Saving for a Rainy Day – Part I – After surviving the worst economic times of our lifetimes (we hope), most of us now realize how tenuous our financial situation can be. In fact, many people I know are still recovering from the crash of 2008 and the subsequent years of financial turmoil.
The question is, have you changed your ways?
Once I hit bottom, I had to completely start over and pull myself up by my bootstraps. This meant living hand to mouth for a long time. However, I also knew that having something in savings was crucial.
Nothing like losing it all to make you scared to death of not having enough.
The last statistic I heard said that most Americans have less than $400 in savings. That’s not enough to cover an emergency much less to retire on. We’re talking about two different types of savings here. Everyone needs an emergency fund and most of us would like to retire someday. I say we need to address both at once without freaking out about getting to the big goal. Rather, I suggest that you focus on doing what we can one day at a time.
Today, we are talking about your emergency fund.
The generally accepted wisdom is that one should have saved enough money to cover six to twelve months of expenses. For most of us, that’s a big nut that is too far beyond our grasp to feel possible. Let’s lay out a plan which will help take the pressure off.
First, figure out the overall amount you’d like to accumulate. My advice is to realistic and start with the goal of three months of living expenses. Once you’ve reached that amount, then you can work toward six months or more.
Of course, in order to get to this number, you must know how much you spend every month. That’s a whole different topic, so let’s presume for now, that you know how to figure that out. Do the math and set your goal for three times your average monthly expenses.
Next, figure out what you already have saved and where you’re going to keep it. I don’t recommend that you keep it in your checking account. Easy access is not a good idea. I recommend that you keep it in a savings account at a different institution than your checking account.
Out of sight out of mind.
At the same time, I would make sure that it’s easy to make deposits into it. If you receive a paycheck via direct deposit, you could split off a fixed amount into the savings account. Check with your employer.
Once you’ve figured out what you have saved, you can easily figure out how much more you need to reach your goal. Setting SMART (Specific, Measurable, Attainable, Realistic, Time-bound) goals is important.
To make this a SMART goal, you need to determine two things:
1) How much can you realistically save every month?
2) How long do you want to take to reach your goal?
After determining the amount, you need to save, you can either decide how much you can put aside each month; dividing the amount needed by the amount available to determine the number of months.
Or, you can take the amount needed, divide it by the number of months you’ve chosen to reach your goal, thereby calculating the amount needed each month.
I suggest you try it both ways. Then decide which is more realistic and set up the auto payments into your savings. Do this either out of your paycheck, or out of your checking account on a set date. If you cannot transfer funds to a different bank, then you may need to have your savings account at the same bank. You should set up an auto transfer on the same day of each month.
If you’re struggling with being able to slice off the amount needed from your budget, you may need to rethink your time frame and make smaller deposits.
The important thing is to get started as soon as possible.
If you must stretch your time goal a little, that’s okay. The amazing thing is that once you set up regular deposits into your savings, it will be easy to keep going even after you reach your initial goal.
After you make it to three months’ worth of living expenses saved, then go for six, then for nine, then for twelve. When you get beyond three, it would be wise to find an account that pays higher interest than a regular savings account.
Either a money market or a CD will pay slightly higher and still leave your money relatively easy to access.
The other resource that you can count into the calculations (at least until you have the full amount saved in cash), is credit. Although it’s not ideal, and I’d specify it’s for emergency use only, having a credit card or other resource to borrow from can count toward the total as long as you are actively saving as well.
Clearly, I’m not an advocate of credit card debt or using them unwisely. However, if you can have them available while you’re saving, it may help alleviate some of the stress of wondering what you will do in an emergency.
Don’t wait another day, sit down today and figure out how much you need for a comfortable emergency savings fund.
Calculate how much you can set aside monthly and how long it will take you. Then, set up auto payments into a specified account and get the ball rolling.
Remember, there is power in knowing you are taking charge of your money life. And you will feel more on top of your finances when you have money saved for a rainy day.
Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (https://strongwomenthriving.com/), a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a new book that both shares her personal story and addresses financial abuse. She can be reached at hello@strongwomenthriving.com. Join our FB page https://www.facebook.com/groups/womensurivingfinancialabuse