Restoring the Lost Petal

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Are You Missing This Key Budgeting Element?

You pay your bills on time. You pay extra on your debts and you have a good handle on your grocery budget. You’re doing well with your finances. Or are you?

Even the most responsible of bill payers misses or forgets a key element in the family budget. This necessary step can mean that you always steer clear of credit cards and rarely have to worry when the surprises of life pop up.

Creating and maintaining an emergency fund is a crucial component of a solid budget plan yet many people skip this step. You do not want to be one of those people. When you forego a savings in an effort to pay off your debts or loosen up the budget you are setting yourself up for future hardships. In my coaching sessions I have seen countless folks who want to change their ways and shed the chains of debt. They’re so committed to ridding themselves of the shackles around their feet they want to jump head first into debt reduction without starting  savings plan.

Don't Miss the Key Budgeting Principle

This is a mistake.

Failure to establish a savings sets up the potential for more debit accumulation in the future. Let’s face it, financial emergencies happen even to the best of budgeters. We never could have anticipated a house fire. You can’t foresee lay offs, illness or (sometimes) a new baby yet all of these things create a budget crunch and rack up debt if you’re not prepared.

Establishing An Emergency Savings

If you do not have a savings I encourage you to start today. Even if you only save $5.00 a week to start. You will be ahead $260 in a year. I know you want to go on vacation, fix the roof or pay off debts but you still need a cushion. Here are a few ways you can start an emergency savings fund.

  • Save a portion of your tax return
  • Have a set amount automatically withdrawn from your paycheck each pay period
  • Stop pay extra on your credit cards*
  • Go out to eat one less time each month
  • Get quotes and compare your car insurance and home owners insurance
  • Have a yard sale, use Craig’s List or Facebook groups to sell unwanted stuff

*It may sound counterproductive to stop paying extra but remember, if you pay down debts but have no savings you’ll end up accumulating more debt when the dishwasher dies or flat tire cant’ be repaired. 

Stages of Building A Savings

There’s no ceiling on the amount of money you should save but there are few guidelines you can follow to help you along the way.

Stage 1: $1000 Emergency Fund

A $1,000 emergency fund will help you weather the small things that pop up every year. The unexpected furnace repair, the last minute trip for a funeral and other such things you can’t predict.

Stage 2: One Month’s Living Expenses

When life hits you hard you are going to need a good safety net. Having one month’s living expenses saved will ensure you are able to sustain your monthly expenses if there’s a serious illness or job loss for at least one month. A thirty day savings fund will also give you the room to make decisions that are rushed or crunched due to finances.

Stage 3: 90-Day Expense Fund

What does it take to keep your household running for a month? Now multiply that by 3. That’s your goal for a ninety day emergency fund. Why go so extreme? Because in 2014 the average number of weeks on unemployment was 36.3. I have been on unemployment and while you get some cash flow it is not enough to sustain most families at their current life style. Once established, a 90-day fund can but put into a limited access account where it can grow with interest but still be cashed in if necessary. Some people break the money up into CDs of various lengths.

Retirement and Beyond

Many young people don’t consider their golden years when they think “savings.” It is important to pay yourself now for a comfortable future? What is comfortable and how much should you have? Those are questions for a certified financial planner and depend on your idea of “comfortable.” To start you off, here’s retirement calculator from Vanguard that. Saving for retirement shouldn’t wait until you reached stage 3. Start today to ensure you can make it tomorrow.

Do you have a savings strategy?

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