We have a problem in this society. A recent report from MSN stated that 46% of American cannot handle an unexpected expense (emergency) of $400. REALLY??? It went on to say that the cure is not a budget because a budget does not account for variable expenses especially those that amount to $400 or more. WOW. The article also said a contributor to this problem is wage stagnation, and that the cure is to be more cognizant of our spending. Hmmm. I do believe monitoring your spending is good however I disagree that expense monitoring alone will solve the problem.
Disclaimer: I am not referring to those with limited to incomes due to mental or physical disabilities.
YOU are the SOLUTION
We believe that people have the ability to thrive at any income level because it is not what you make but what you do with what you make. See if we effectively play the cards we are dealt we can win the hand (maybe with a little bluffing, but the possibility is there). The concept here is strategizing/planning. Strategizing before we spending is one of the keys we teach in our Financial Wellness Seminars. Relating to this phenomenon of not being able to hand a $400 unexpected bill we say hogwash. We teach that one can provide self-insurance like an emergency fund. An emergency fund protects your paycheck from being gobbled up by the unexpected bill.
How?
Saving is not as challenging as one would make it out to be IF it is made a priority. When we say priority we do not just mean with our intentions, but really prioritize by making one of the first actions you do when we get your paycheck is laying aside for savings 1st. This is commonly known as Paying Yourself First. PYF is key to creating insurance against the unknown. But you literally have to “PYF it” before anyone gets a dime. The best way is to make it automatic. Have your paycheck automatically allocated to separate accounts; one for saving another for checking.
We tell folk to take it a step further and create the savings account in a separate institution from their checking. Totally making it hard to get to. The saving account is an insurance, not easily accessible so not seen as a possible slush fund for that weekend party coming up. In fact, we suggest you develop rules of engagement for withdrawing from it. Write it down and abide by those rules.
Build up the Funds
Now build up the funds. You can build up the funds simply having the PYF mindset and allocating funds into a separate saving account. But how much you ask? Here is a way to figure it out. You will need to calculate one of the following three variables; Total amount, When and Payment. We call this the payment approach
- Determine how much you want to save: TOTAL
- Determine WHEN you want to have that amount
- Calculate payment; TOTAL / WHEN = PAYMENT (t/w=p)
If you already know how much you can contribute to the account (payment) but want to know how long it will take?; slightly adjust the formula: TOTAL / PAYMENT = WHEN (t/p=w)
RECAP
Despite what MSN and those surveys say, you can ensure your self against the dreadful unexpected bill (especially of $400) by doing the following to create a “self-insurance” fund (aka emergency fund).
- Create an account separate from checking (preferably at another Bank)
- Set rules of engagement
- Calculate how much to contribute using the payment approach
- Automate contribution