Saving emergency money
So far this year things have been going all right for you, hasn’t it? The school fees are paid, the rent/mortgage is current and the vehicle is running smoothly. Not a financial care in the world, right? But as old time people use to seh, when fire deh a muss muss tail, him tink a cool breeze.
Are you prepared for life’s surprises? Having an emergency fund is a must in life. You just never know when the worst can strike. Job loss or illness are some of the more horrible events that can derail your finances. But what if your house needs a new roof? Or what about your car’s engine – are you willing to bet money that it will never fail you?
You have to be prepared. In my experience, a rainy day fund is just like having a spare cylinder of gas. When you don’t have one, the cylinder hooked up to your stove runs out in the middle of Sunday cooking. But if you have a spare, the cylinder lasts and lasts. So, you’ve got to have a game plan. If you have regular or even irregular sums of money coming in, the first step is to prepare for emergencies, then begin investing. It makes no sense to put all your money away for retirement if an event occurring right now has the ability to ‘mash you up’ financially.
Note that I am not advocating paranoia or mass hysteria. Just sound financial planning. “But I don’t have any spare money,” you say. LIE. You have more money than you think. As extolled in previous articles, you just have to cut the fat out of your budget, as painful as it may sound. Most financial experts say that you should have between 3 to 6 months living expenses stashed away. And the most basic living expenses are food and shelter.
Example
If rent is $15,000.00 and the food bill for the month
is $11,000.00 then you should aim to have saved between $78,000.00 ($26,000*3) to
$156,000.00 ($26,000*6).
Now how much money beyond the basics that is placed into your emergency fund is up to you. However, the weekly mani, pedi and a new pair of really cute shoes every month does not constitute an emergency, in my opinion. And please don’t hyperventilate if you don’t have the necessary amount already saved. One rule of thumb is to save at least one month’s emergency money each year. This works out to 1/12 of your yearly salary.
Example:
Yearly salary: $500,000/12=$41667
$41667/12=$3472
Your goal should be to save $3,472.00 each month and that shouldn’t be too painful.
In order to have adequate savings consider the following:
* Set aside 5 percent of your pay-cheque before paying your bills.
* Consider shaving $500.00 off each category in your budget and putting that money into your emergency account (You do have a budget, correct? If not, go to the back of the class.)
* Save all coin money and spend only paper. By month end, you’ll be surprised that those $10 and $20 coins add up to at least $500.00.
* Deposit pay increases into the emergency fund and continue to live on the amount you were already earning.
* Cut unnecessary expenses. Go to the salon once a month for six months and put the savings away.
Now where to save the money – there are so many options. Call your credit union or other financial institution and ask about their fix deposit or money market rates. Also, contemplate saving the money at a bank/financial institution that you don’t regularly use, thus avoiding temptation to ‘dip and fall back’ when cute shoes go on sale.
Finally, there is another emergency money option – the credit card. Now, this is to be used with caution because as we discussed last week, what you charge must be repaid. Credit is not free money and should only be used in an absolute dire emergency. So apply for a credit card and then hide it from yourself. If sickness strikes or a wicked natural disaster occurs, you have my permission to use it. But if you don’t have good financial habits (or else you would have had a emergency savings already) then using the credit card without strict guidelines will only get you into a debt trap which can become an emergency in and of itself.
