If you’ve spent a little time on your personal finances every week over the last month or so, you now have a good idea of why money matters to you, your net worth, and where your money goes each month. You’re making great progress! You’ve maybe even turned some habits into occasional treats (and because of it are spending less money) and also cancelled a subscription that isn’t adding value to your life. You can read how I saved money last week here.
Now that we’ve built the framework of what’s important to you and where you spend your money, it’s time to talk about how to save. Remember, if you cancelled your Hulu subscription last week, you’re not really saving $8-$12 a month if you then just spend that money on something else.
So, where should this money go? And, do you need to cut back even further to really start saving? The next few posts will talk through these questions.
First and foremost, we need to talk about fires and emergencies.
As Mr. Money Mustache says, if you have credit card debt you should be running around like your hair is on FIRE. Seriously, credit card debt is NOT OKAY, and I’m not going to beat around the bush about it. If you want excuses, you’ll probably stop reading and say I’m full of it or it’s too hard given your situation. BUT, if you want to take control of your financial life you’ll find every place you can to cut expenses and pay down your credit card debt as fast as possible, once and for all.
Honestly, we live in America (almost all of us anyway) and most of us have cars and nice clothes and a computer and an iPhone and tons of other electronics. We go out to eat and have heat and air conditioning and indoor plumbing. We spend money on hobbies. We go to concerts and shows and take vacations. We live extravagantly and there is room to cut back, especially if you have credit card debt. Pay off your credit cards!
(Disclaimer: If you use a credit card but pay it off monthly, this rant is not for you, except to say congratulations and to serve as a reminder to keep yourself out of credit card debt.)
Okay, now that we’ve covered the fact that your hair is on fire and you’re walking around like you’re totally fine, let’s talk about emergencies.
Emergencies happen. You could lose your job or find yourself having to pay for an unexpected car repair. Things come up. Life happens. We know this, so instead of worrying and spending our energy stressing about how we will handle the emergency financially – or going into panic mode when it actually happens – let’s prepare now by building an emergency fund. An emergency fund is your “do not touch except in the case of real emergencies savings account.”
You will often read than an emergency fund should cover anywhere from three to twelve months of living expenses. Living expenses include your non-discretionary expenses – all those bills you pay on a monthly basis – plus money for food and gas and whatever else you deem necessary to survive and live. [Note: If you lose your job, expenses such as 401(k) contributions and tithes based on income will likely go away.] Figure out how much you need to live on a monthly basis. And remember, loan payments and credit card debt don’t go away just because you aren’t working.
Now, how many months of that amount do you really need to keep in an emergency fund? The short answer is however much you feel comfortable with. But let me elaborate.
The amount you keep in an emergency fund should take into account how much you need to have the peace of mind that you will be okay in the event of an emergency or unexpected event. For some people that is three months, for others that is twelve. Do what works for you.
It is also important to consider your job and particular situation. How secure do you feel in your job? How difficult, given your field and experience, would it be to find a new job? Are you willing to work a temporary job while looking for a new one? Also, do you own a home? That means when the fridge breaks you pay for it, as opposed to calling your landlord (unless your landlord has indicated certain expenses which the tenants are required to cover). Do you have an expensive car, which could require costly repairs? Or, is your car on its last leg and likely to need replacement soon?[Note: Buying a car would not come out of your emergency fund, but expenses for repairs or to get you over the hump while shopping for a new car may.] Your unique situation and comfort level matter. That should be your guide to determining how big your emergency fund should be.
Bonus: If you keep your emergency fund in a high yield savings account earning 1% interest, at least that money will grow a little – and much more than the 0.01% rate of many bank accounts. (I use Ally Bank. American Express also has a good offering.)
So, this week I offer you a challenge: If you have credit card debt, how much could you pay down between now and the end of the year? If you do not yet have an emergency fund (or an insufficient emergency fund), how much could you save between now and the end of the year? Now, go do it!
Double bonus: If you want to save an extra $300 this month (or whatever the number is for you), save it at the beginning of the month. Automate. Save first. Then spend what’s left.
Let me know how it goes and let me know how I can help.
If this is all old news to you, “Let Luc” this week and we’ll start talking retirement savings and investing soon.