But if you are to be frugal with your financial affairs, you need to start planning during those years when everything is going your way. Planning for that inevitable rainy day is a wise move before the bank forecloses on your home.
With so many choices it's easy to get confused as to where you should start your savings program. Start a savings plan and stick with it. Form the habit of saving 10% from every paycheck. If the economy doesn't make an unexpected downturn, you might be downsized, your skills no longer necessary as your company shifts to cheap labor overseas.
There's more to saving for a rainy day with a few extra bucks in your bank account. Being frugal in what you buy and how you handle your money can save in the long run, especially if you form good habits today:
--BUDGET: Budgeting is something we usually put off as tedious work. But if you're going to prepare for a financial crisis, preparation is essential. Most of us don't watch our spending and that means we end up short between paydays. Most of the money you spend is wasted, spent on things you don't really need and can live without. There is a difference between need and wants. Lunch hours put a drain on the pocketbook. Small purchases add up to a big expense. Bringing a sandwich shaves off a good deal than buying at the company cafeteria, the chip wagon or that Cap at Starbucks.
--PLAN: Once you know where you are wasting your money, you can set up a plan. Planning means more than just where you want to go during your vacation. Most people spend more time planning for their vacation than they do with their day-to-day financial affairs. For example, how often do you go shopping without a shopping list? Impulse buying wastes a great deal of money. Whether you have a large family or live alone, shopping for only the essentials will help salt away a great deal of extra cash.
--We have a love affair with cars. There's a great urge to own the newest, fanciest, speediest and biggest car we can drive without much concern toward the costs that getting a new car every three years may bring. Considering that a new car loses half its value within the first year of purchase, you're wasting a great deal of money just to keep up with the neighbor as he goes out to purchase that Hummer. With the proper maintenance, a car can last 3 times longer than the time the average owner keeps his car for. Cars are depreciating assets no matter at what price they sell for.
--Credit cards are one of the biggest drains on your finances. The average family owns up to 8 credit cards, a good invitation to overspend and rack up a heavy debt load. If all you ever do is pay off the minimum balance every month, it will take you 20 years before you see a zero balance. Convenience has a sharp edge. Use them in conjunction with your budget and have enough to pay off the total balance when the next statement arrives.
--Your mortgage is likely not set into stone. Likely, your mortgagor allows you to make additional payments so you can shave off a lot of interest payments. Just one additional payment every year either as a lump sum or in monthly increments can reduce a 30 year loan down to 18 years. That translates into considerable dollars on interest.
--Set aside 10%. Believe it or not, setting aside just 10% of your hard-earned money is not likely to impact your lifestyle. No matter what medium you put your money into, it should bring a return over inflation. Solid investments can lead to a very comfortable retirement to enjoy the things you want most out of life. Consult a financial adviser who can help you find better ways to earn interest beyond just a savings account at your bank.
Savings accounts at your bank won't earn you much interest, so use it for emergencies. With the onset of winter heating and electrical expenses go up. Most people don't plan to have additional funds when winter hits.
The above is just a few of the things you can do now to prepare yourself for tomorrow. There's a lot more you can do on a daily and consistent basis. But by doing things now during the boom times can insure that your future doesn't go bust as it will for the millions who fail to plan ahead.
Financial experts agree that a family's emergency fund should be large enough to pay their expenses for three to six month's worth of living. This means enough money to pay your monthly budget for up to six months. Seems like a lot, and it can be if you have no savings at all, but it's not impossible to save this amount. The first thing you'll need to know is how large your "Rainy Day Fund" needs to be. So the first step is to figure your monthly expenses: mortgage payment, car payments, insurance, household expense, groceries, and so forth. Include everything. Don't forget your monthly bills like cable television and electric. For the average household in America, this totals to about $3,400.00 per month. Once you know what your number is, you can times it by three and by six to get your three and six month goals. So if yours is the average, three months is $10,200 and six months is $20,400. Big numbers, but you'll see how they can become workable. What is this emergency fund for and why are you supposed to have it? That's a good question and one that should be answered because it's your incentive for working towards having your six month's of funds available. We live in an uncertain world with uncertain times and economies. You never know if you're going to lose your job tomorrow, need a new roof on your house, or have a disaster happen. Emergencies have a way of showing up when it's most inconvenient. That is what your emergency fund is for. If you're saving for retirement, then (in a way) you're putting away an emergency fund. Your emergency fund can be as easy to set up and build as your retirement fund is. All you need to do is think about your goal and figure out how you're going to attain it. You'll soon see that saving three or six month's worth of expense money is chump change compared to your fifteen or more years of retirement funds. So approach the emergency fund like you would any financial goal: think ahead and plan right now. You've already figured out your monthly expenses, so now you need to look at an overall monthly budget. How much do you make in a month and what is the difference between that and your expenses? Most people consume about 65% of their incomes in just housing, food, and transportation. That means you've got about 35% of your income to work with: income that is "discretionary." Now you have your goals and an idea how you're going to get there. Obviously, that whole 35% number isn't available, but it's your starting point. Consider your savings plan over a 2, 3, and 5 year period and see if you can achieve your three month's emergency savings inside 3 years. Working with our $3,400/month number from before, you'll see that this is only $340.00 per month for two and a half years. That's 10% of your income. Now for the fun. Over time, you can increase what you're putting into savings by changing some of your lifestyle habits in the long run. For instance, when it comes time to buy a new car, opt for one that's less expensive to purchase or to operate (or both). Find out if refinancing your home mortgage or a debt consolidation procedure would save you money over time. Consider donating time, money, or items to charities to increase your tax savings. And if you are using more than one credit card, check if a balance transfer option would work for you. These are just some of the ways you can increase your savings over time. If you keep your goal in mind, set up the payments to the emergency fund in the same way you do all other bills, and then work towards your goal diligently, you can have a six month emergency savings before you know it.
Both Mario Carini & Darren Cason are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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