It Pays-off to Pay Yourself First
Haven’t we heard it one too many times that we need to put away savings? It’s true – and you and I need to hear it over and over again to remind us that it is the right thing to do.
Whatever income that’s paid to us through our work isn’t considered ours until we set that aside in a savings account. We know how quickly bills claw its portion and devour whatever money that sits in our account. So pay yourself first. Savings is a blocking plug you put in place, a stoppage for money that whirl down the drain.
You need to be able to pay for extra expenses without derailing your spending plan. The ruthless villain of unexpected repairs or unplanned medical expenses cause carnage, and it always attacks from your blind side. We need to be ready to stand our ground and prevent future financial setbacks by creating a cushion.
How much is enough?
A buffer of $500-$1000 is initially adequate in case of emergency. You really shouldn’t rely on a credit card “in-case-of-emergency.” This way you avoid paying interest and fees charged when paying with it.
A good sense for credit card use is to use it only for money you already have and can pay back. If you don’t have it in your account, don’t charge it. Ironic? Not quite. This is how ill-prepared consumers get caught in a snare. Remember that even though this credit is made available to you, this isn’t technically your money – it’s the bank’s.
**3-6 months**of regular living expenses if single with no children
**6-9 months**if married and/or have children
How do I get started with creating an emergency fund?
- Determine how many months of expenses you’ll need. Set this number now because you can only manage what you can measure.
- Open a savings account that holds emergency fund exclusively. Don’t mix in your savings with your daily spending account.
- Start an automatic contribution plan to build up the fund. Set it and forget it. Let your savings balance grow in peace without you interrupting that growth process.
- Find additional funds in your monthly budget. Give that money to yourself not to the restaurant or to a retailer, and put it instead into your savings account.
- Use your savings only when necessary! Know the difference between need and want.
How do I make this easy?
For expenses that occur once or twice a year, I highly recommend setting up a Sinking Fund Saving Strategy. What does that look like? Let me give you an example:
Christmas is always on December. Yet somehow this holiday still sneaks up on us, and it breaks the bank when we get our loved ones presents. Go set how much you plan on spending on gifts, let’s say $1000. Spread that across 12 months and start saving proactively for Christmas on January. That is $83.33 per month of sinking fund incorporated into your monthly budget. Isn’t that a better proposition than having to continue paying for your Christmas shopping bill from last year (even previous years!) bleeding into this year because you put it on a credit card?
You may set-up a sinking fund saving strategy for:
- Semi-annual schedule of auto insurance bill
- Annual utility bills like sewer service
- Vacation trips
- Technology upgrades and purchases
Finally, I would encourage you to be patient in this process. It may feel like your progress is slow, but keep moving forward. Small amounts add up over time. And over time you could improve at this if you are intentional with setting a goal and hitting that goal.