Taking Control of Your Finances, Part III - Save It!

When you’re up to your eyeballs in debt or barely keeping your head above water living paycheck-to-paycheck the last thing you want to think about is starting a savings account.  Girlfriend, let me tell you, that is exactly what you need to be thinking about!  Living on the edge of financial disaster is a scary and tiring place to be.  It’s time we move away to financial security $1 at a time and it starts with a savings account.  

A savings account or contingency fund, as Mary Hunt, author of Debt-Proof Living , calls it, is your ticket to handling major emergencies without relying on your two-faced friends, Visa and Mastercard.  A contingency fund is not your retirement account or an investment account and you should never consider a home equity line of credit as a contingency fund.  A contingency fund is there to give you a soft place to land in the event of an actual emergency.  Your contingency fund is not for Christmas shopping or car repairs or saving up to buy a new sofa.  Those are considered irregular, intermittent recurring expenses and we’ll talk about dealing with them in another article.  In this case, I am talking about the truly unexpected events in life like the loss of a job or a catastrophic illness or a devastating home repair.  You know they are a remote possibility and you hope you dodge that bullet but, if you don’t, what would you do?  How would you pay for it?  Most of us don’t think about these things until they happen to us and, unfortunately, that is not the time to be making major financial decisions.  So, let’s get started on that contingency fund so that when the truly unexpected happens we are prepared to meet it head on.

In Part I of our series, I introduced you to the 10-10-80 principle of money management.  One of those 10s is saving.  We are going to work up to saving 10% of our income every month in an interest-bearing savings account.  Now, don’t hyperventilate.  Some of you will be able to trim the financial fat, so to speak, and begin to save that much right away.  Others will have to start much smaller and build up to 10%.  The important thing is that you are doing something.  Start by determining an amount that you feel you can comfortably save every month and then add $20 more.  We need to push ourselves out of our comfort zones if we want to make a real and lasting change.

If you aren’t sure where the money is going to come from, start evaluating some of your spending.  You’ll be surprised where you can save money and it will add up quickly.  For example, do you actually use that gym membership?  How much do you spend on a latte from the coffee shop every morning?  Could you save money by packing your husband or kids’ lunches every day rather than having them buy lunch?  How often does your family eat out every week?  Do you really watch all 500 channels on your cable or satellite TV?  Maybe you can switch to basic cable.  These are just a few ideas for finding that extra contingency fund money.

Now, let’s find a place to park it.  According to Hunt, there are three important factors to consider when opening a savings account:

1.    Safety – this is your emergency money.  It has to be fiscally safe.  This is not money to be invested in the stock market.  You want it to be exposed to as little risk as possible.

2.    Availability – you must be able to get your hands on it within 24-72 hours.  Emergencies don’t wait for you to liquidate so make sure your money is easily accessible but not easy enough to spend on an impulse buy.

3.    Growth – hopefully you won’t have to use your contingency fund very often so you want it to grow while it sits there.  Choose a financial account that will offer some type of interest on your principal.

Do some research to find the best place for your money using the standards listed above.  There are many options such as a traditional passbook savings account at your own bank, an online savings account such as ING Direct, a money market fund, certificates of deposit, treasury bills and even high interest bearing checking accounts.  Whichever you choose, remember that you will not be touching this on a regular basis; it is only for a true emergency.  Finding an amazing sale on a new pair of to-die-for suede boots is not an emergency!

Once you’ve found an account and determined an amount to be saved every month, your next step is to set up automatic withdrawals from your regular checking account, just as you would a retirement savings deduction or other automatic bill pay options.  Essentially, you are paying yourself first.  After a while, it will become a routine for you and you won’t even notice that the money is gone.

 
Finally, when you have all of these pieces in place, you need to determine your savings goal.  Most experts say that we should have three to six months living expenses available in an emergency fund.  However, this number will differ from family to family.  If you aren’t sure where all of your money goes every month, it may be difficult at this point in your financial journey to figure out how much that amount would be for your family.  If this is the case, Hunt recommends setting an initial goal of $10,000 for your contingency fund.  As you get a handle on your finances you may be able to adjust that goal up or down based on your family’s needs.

Setting up a contingency fund seems like a tall order but it’s a necessity in today’s turbulent financial world.  We need to take control of our own financial futures, even if we can only start with baby steps.  As we watch greedy Wall Street bankers siphon away our money, political unrest cause skyrocketing oil prices and natural disasters bring entire countries to an economic limp, we must reign in our own spending.  The best person to ensure your stable financial future is you.

 For more articles in our Taking Control of Your Finances series, check out the Finance Mom section.