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You Need Savings

by Keith Rawlinson
Volunteer Budget Counselor

The big question.

I am occasionally asked that if I, as a Budget Counselor, could get people to do just one thing financially, what would it be?  I don't even have to think about it.  I would want people to have a savings account for emergencies.  Next to debt (which we'll discuss in another article), lack of savings, in my opinion, leads to the most financial stress in the lives of Americans.  

On the Eclectic Site Financial Page, I gave two basic tests to determine if you are in financial danger.  One was the unexpected bill for $1,000 and the other was how long you could go if your income were completely cut off.  Giving it very little thought, it is easy to see that both of these problems could be dealt with if you had a good amount of money put away in savings.  Don't worry, I am going to get into how to go about building up an emergency savings account and how much you should have, but before we get to that, I need to convince you that you truly do need an emergency savings account.

Don't forget that 70% of Americans are living paycheck-to-paycheck (all the money is gone by the time the next paycheck comes along).  Well, you should find this next tidbit interesting: 70% of Americans admit that financial emergencies in their lives are dealt with using a credit card.  I don't think it's a coincidence that those percentages happen to be the same.  Why are they using a credit card for financial emergencies?  Because they are living paycheck-to-paycheck and there is no money left over to use for emergencies.  And if financial emergencies are going on the credit card because there is no money available to pay for the emergency, where is the money going to come from to make the increased credit card payment?  And what if while you're trying to pay off the credit card from the last emergency, another emergency comes along?  It goes on the credit card and now you have another increased payment to make while having no money left over from your paycheck.  If you've lived this scenario, then you know what I'm talking about.  If you've never been there yourself (yet), can you at least see how quickly this scenario would take you down financially?

Now, what if you have built up an emergency savings account?  When the first emergency comes along, you take the money out of your emergency savings and pay the bill.  Then you continue to build up your emergency savings just as you have been.  When the second emergency comes along, you also pay the bill from the emergency savings and then go right back to building that savings back up.  Also remember that during the time between the first and second emergency, whatever that time may be, you would have been adding money to your emergency savings, so you would have this extra money, in addition to whatever was left in your emergency savings, available to deal with the second emergency.  Can you see how much more easily the financial emergencies in life can be handled if you have savings?

Just in case I haven't yet convinced you of the need for emergency savings, consider this: If you are living paycheck-to-paycheck and you have no money in savings to deal with emergencies, something as small as a $50 problem becomes stressful.  If there is no money to deal with the $50 problem, you are going to be worried about it.  Or, you are going to put it on a credit card in which case it becomes stressful later when you are trying to make the credit card payment.  How much more stressful would be a $100 problem?  How about a $700 car repair?  How about an unexpected $900 visit to a hospital emergency room?  See how quickly it gets out of hand without emergency savings?  I hope by now I have you convinced that you need savings, and that leads us to the next question:

How much do you need?

Let's first talk about how much you need.  The very least anyone should have in emergency savings is $1,000.  Yes, I know that can be an awful lot of money to save up, but it can be done if you are determined enough.  Why this amount?  Well, if you think about it, most of the common financial emergencies in life can be handled for $1,000 or less.  Most car repairs/maintenance can be taken care of for $1,000 or less.  The water heater in your home can be repaired or replaced for $1,000 or less.  Doctor visits are often under $1,000.  Plumbing repairs are usually under $1,000.  Repair or replacement of major household appliances is generally under $1,000.  See how many, very common financial emergencies can be dealt with for $1,000 or less?  I'm sure you can probably think of many more.  Of course $1,000 won't take care of loss of a job or serious medical problems, or replacing a worn out car; but, it will take care of the relatively small financial emergencies which, by the way, are the most common ones.  

You will use your emergency savings to deal with the little financial emergencies that will occasionally pop up while you are getting out of debt, which we'll discuss in the next article.  If an emergency does come up, and you have to use any of your emergency savings, you temporarily stop everything else you're doing until you build your savings account back up to what it was before the emergency.

Ideally, you should strive to eventually have at least three months worth of your take-home pay saved up.  In other words, the amount of money you bring home in a month multiplied by three.  I know, I know, this is a huge amount of money.  Don't forget I said "eventually."  And to be perfectly honest, if you do all of the things that I'm teaching you here on the Eclectic Site Financial Page, it won't be long before saving up three months worth of income will be a lot easier than it seems right now.  But, let's not get ahead of ourselves.  For right now, just starting out, I would be happy if you just got that $1,000 saved up for emergencies.  Now let's go on to the next issue:

Where do you get it?

Let's start with the easiest ways to start building emergency savings.  If you get an income tax refund each year, that's a great place to start.  It is not uncommon for a tax refund to be between $1,000 and $2,500.  If that is the case, you have your minimum emergency fund just by saving your tax refund instead of spending it as most Americans do.  Even if your refund is only $500, you already have half of the minimum you need for emergency savings.

Do you ever receive money gifts for your birthday or for Christmas?  If you are graduating or getting married soon, will there be some cash gifts coming your way?  Do you ever find money laying on the street?  If so, use it for your emergency savings.  Yes, it's not nearly as enjoyable as spending it on fun or on "stuff," but it's also no fun to be financially stressed and living in fear of the next bill to arrive.

How about getting more hours at work for a while?  Or a temporary second job?  Or doing some babysitting, childcare, pet sitting, house sitting, house cleaning, lawn mowing.  How about selling stuff you just don't really need?  Do it, and put the money into emergency savings.  

Now, the most powerful, and probably the most difficult way of getting money for emergency savings: saving something from each and every paycheck.  Look at your spending.  Quite often we are living paycheck-to-paycheck for two reasons: too much going out in debt payments, and little bits of money getting spent here-and-there without us even realizing where it went.  Too much debt will be dealt with in another article, but the spending we'll talk about now.

Where'd it all go?

We regularly spend little bits of money here-and-there each month that we don't keep track of; so, we don't even realize where the money is going.  Need an example?  OK, let's say you buy a bag of chips and a soda every day at work.  Let's say the chips are 75 cents and so is the soda.  That's $1.50 per day going into snacks.  If you work 5 days a week, 52 weeks per year, that would be $390 for the year.  That's quite a bit of money and you probably wouldn't even realize where it went.  Just for fun, what if you put that in the bank at say 4% for the five years you work there.  That snack money becomes nearly $2,000 during that five years!  The lesson here is to find things in your life that you spend money on and don't really need to.  Don't worry about how little it may be.  A big part of what will get you ahead is just having the discipline to do the things I'm teaching you.  And besides, you'll be amazed at how much money it can actually add up to.  One more example: Let's give up going out for a pizza.  Let's say that pizza costs $13 and we've been buying four per month.  Let's take our $13 and put it into that 4% bank account.  We now have $635 in just one year.  We'd have around $3,500 in five years.  Now that's money!  So, find things in your own spending that you can cut back, or cut out, and put the money in the bank for emergency savings.  And don't forget that I did these calculations at a 4% interest rate.  Since you should actually be able to do a lot better than 4%, your money would build up even faster than in these examples.  Just make sure that any and all money you set aside for emergencies goes into a plain old, boring bank account.  This money is NOT to be invested.  Don't worry about the interest rate you do, or do not, earn on the money.  You never know when an emergency will come along, and you don't want your investments to be down right at the time you need to cash them out for an emergency.  Keep your money in a nice, safe, insured bank account where you can get it quickly if you need it.  After you are out of debt and financially stable, then we'll worry about investing.  For now, let's just build up savings for emergencies, and start working on getting out of debt.

So now you know.

You need to have emergency savings.  Without emergency savings it will be very difficult, if not impossible, to get ahead financially.  If you have no emergency savings, then while you're working to get ahead, each financial emergency, large or small, that comes along will knock you right back down again.  So use the ideas I have given you here to start putting money into emergency savings.  Build that savings up to the minimum $1,000 as quickly as you can.  Stay focused.  Be determined.  Do what it's going to take not to live paycheck-to-paycheck.

Is this easy to do?  Nope, it sure isn't.  It takes discipline and determination.  It's hard to do and that's why most people won't do it.  That's why most people are broke and financially stressed.  That's why most people are living paycheck-to-paycheck.  Don't be one of them.  Take the steps it's going to take to put you ahead of the 70% of Americans living paycheck-to-paycheck and start by building up your emergency savings.

...he who gathers money little by little makes it grow.

Proverbs 13:11

To learn a lot more about saving, investing, eliminating debt and becoming wealthy, please read the articles on the Financial Page.  There, you will find a veritable treasure of what to do and how to do it.

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This article copyright 2007 by Keith C. Rawlinson (Eclecticsite.com).  All rights reserved.
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