Tuesday, January 13, 2015
Save Three Months Worth of Expenses; the Slow and Steady Method
One of our most common social traps is money. Money represents a form of power in our society, granting its wielder the ability to provide for themselves and make manifest their desires. Money has long been regarded as one of our social ills; it is "the root of all evil" after all, yet it is also the life-blood of our society. Philosophers and economists alike have discussed the pros and cons of money as the basis of trade and alternate systems that might be better in a practical and moralistic manner. Our society is based on economics; you have to have a means of getting money to survive.
The point of this discussion is not to promote alternatives to money; alternatives are meaningless when trying to negotiate for goods with a society that accepts little else than the coin of the realm. We are also not going to perpetuate money as a social ill to be avoided; authors of esoteric systems and philosophies often decry materialism encouraging (or enabling) people to live nearly destitute while they profit from the sales of their materials and merchandise. Money is a part of the financial system we are engaged in, thus we must learn how to use it if we are to become relatively more free from it. Money can either be a problem or a solution, depending on how we choose to use it.
The trap our society lays with money is an interesting one. First, children are taught to want what is unnecessary. The toy they have is never as good as the toy the do not. Each year, they expect "new" things on their birthday and often other holidays, and we parents take pride in being able to provide for those frivolous desires. An artificial "need" is created, and when the child comes into their own earning power, they discover they can use their money to fulfill that need at will if they have enough money.
Second, society has aligned itself so that our basic, real needs (food, shelter, etc) cannot be fulfilled without money. One cannot simply find a cave and move into it, or hunt game in the countryside without paying at least some fee for the privilege. We are required, by law and by social mandate, to engage in the common economy.
Third, the workforce that supports our society is encouraged to take on their own socially directed requirements well before they have the earning power to provide for their own needs. Most people leave the homes of their parent about when they are 18 and join the work-force, living paycheck-to-paycheck while often going into debt to provide for themselves and their desires.
Ideally, parents would take steps to help their children avoid this trap, something we discuss in another article. For now, we will assume that this is the trap you find yourself in; you work a typical job (40 hours a week) and earn just enough to pay your bills and provide for the frivolity that keeps you sane when not at work. You may have a moderate amount of debt to a variety of creditors, and no savings to speak of. This will be our starting point. If this is not you, then consider yourself lucky and continue to read as some of the above may still apply or in case some misstep should cause you to fall into this trap.
Consider the goal of saving three months of your total bills. What is the purpose of this savings? Are you happy at your job? Recent surveys suggest that majority of US citizens are not. Yet, because you live paycheck-to-paycheck, you continue to go back to your job to sustain yourself. Employers are cutting costs by cutting employees. The days of our grand-fathers when loyalty was a factor in the employee-employer relationship are long gone. If you lose your job, you could lose the things you own, lose your residence, you could even bring your relationship to an end. Far too much rides on your being at work. If you had at least three months of your bills saved, the spectre of unemployment would not loom so heavily over you. The loss of your job would mean that you have 90 days comfortably to seek new employment with no real adverse effect to your life-style. The loss of this burden is a tremendous weight off the shoulders of most. This could also make a menial form of employment a little more tolerable.
The problem is, once again, you are living paycheck-to-paycheck. There is little or no obvious flexibility in your income to allow you to generate the $3000-$7500 that is commonly three months worth of your finances. We will need to approach the solution to this problem from a variety of directions and through incremental steps. No one approach will be suited for all individuals, and each person will achieve their goals at different rates.
First, you need a solid assessment of your situation. Make a list of all your regular, monthly expenses, dividing the list between consistent expenditures (those that are the same each month) from fluctuating expenditures. This initial list is for necessities only, not payments to creditors or regular expenditures for things beyond your basic necessities. Your unnecessary expenditures go on another list. Your regular, necessary expenditures are for now your focus and priority.
Round up the consistent expenditures to the nearest dollar individually and multiply each by three. With the fluctuating expenditures, estimate the average monthly amount (estimate high rather than low), and multiply that amount by three. You now have a target amount for each necessary expenditure that covers that cost for three months. It is also a good idea to take your monthly total and compare it to your monthly net income (how much money your bring home each month). You might find yourself with $500 or more in surplus, and wonder where this money goes.
Begin generating a savings that will cover the smallest expenditures first. Many of us will have some small, monthly expense that can often be covered for three months by setting aside $30 or less and requires no incremental savings for most of us. Simply set the money aside for that one expenditure. Put the cash for that item away; in a box, a book, your sock-drawer... where ever. Eliminate these small items from your list one pay-period at a time. This self-payment should be the first expenditure from your paycheck beyond any necessary monthly bills. Pay yourself before you pay any of your creditors, if you can pay your creditors at all.
Once you reach an item on your list that requires a larger amount than you can comfortably manage in one lump self-payment, break it down into a personal "payment plan", an amount you pay yourself from each paycheck toward covering the savings for that expense. Select an amount that is comfortable for you; as little as $5 or as much as you can handle. The faster you reach your goal, the better, but not if it means that as soon as you reach it you have to begin drawing from it to recover.
One way to jump-start your savings is to go on a one-month spending diet. Simply avoid spending money on anything frivolous for a month; no eating out, no entertainment, no snacks outside your grocery budget, no new purchases. If you can manage it, you will not only have a nice lump amount to attribute to your rainy-day fund, you might learn something about yourself in the process, seeing just how dependent you have become on frivolities offered by our society.
Once you save about $200 of your funds for your three-month savings, it is time to start shopping for a savings account, even if you already have a bank. If you have a checking account that you use for your expenditures, then it is unwise to use the same bank for your three-month savings at this time. You do not want your savings adversely affected by a problem with your checking account; if you over-draw your checking account your bank may cover the overdraft with funds from your savings account and often attach a fee for doing so. This is counter-productive to your efforts. Avoid overdrafts, but also avoid risking your "rainy-day" funds. For the time being, find a reputable bank or credit union you do not have a checking account with and open a savings account only.
You are looking for a savings account that is interest-baring and has no fees; you want the savings to build, not be reduced by another monthly expense. Most standard savings accounts will have a limit of $200 or more to be without fees. You simply open an account when have an amount saved that exceeds the required fee-less limit. If the account offers an ATM card, this can be helpful for making deposits, but not if you use it as a check-card for purchases. Many employers offer direct deposit, often with the option to deposit each pay-period into multiple accounts. Take advantage of direct deposit by sending your self-payment to your savings.
When you reach the larger expenditures on your list, your self-payment should be whatever you can manage comfortably. Calculate the date that each item should reach its goal based on your rate of investment, and mark those dates on a calendar in pencil. This is a "rainy-day" fund, so should an actual need arise you may need to adjust your dates. Just keep in mind that these funds are for the purchase of your peace-of-mind and relative freedom. Avoiding spending these funds unless absolutely necessary.
Your list of expenditures was divided into two categories, consistent expenditures and fluctuating expenditures. The consistent expenditures, like rent, are pre-set and offer you no way of reducing them. Your fluctuating expenditures, like utility bills or groceries, do offer you some amount of control. Take control of these expenditures! The internet abounds with advise to reduce your grocery costs through meal-planning, use of coupons, and smart-shopping. Hundreds of solid web-sites offer strategies for reducing your utility costs from installing energy-efficient light-bulbs to local programs that provide energy assistance. For every fluctuating bill somewhere there is a means for controlling it. Money in our society is a kind of power, but it is parcelled out to us in a limited amount. The further we can stretch our dollars, the more of this power we have when we really need it.
The next strategy toward achieving our three-month savings is find additional funds outside those provided by our jobs. Opportunities abound for generating an income without working for someone else. Start by taking a look at the things you have in your home. You have things you need; clothing, furniture, dishes, and so on. You have things you want; books, games, toys. No doubt, you also have things that you no longer care about or use. Many of those things can be sold through venues like eBay or Craigs List, especially if you are not concerned about getting a "fair value" for the item. If you don't need it, sell it.
What you do have, you need to learn to maximize. Take care of your things, and learn the simple skills that allow you to keep them in good, working order. Have a small sewing kit for mending split seams, use a canned-air cleaner on electronics regularly, learn to change your own oil and do a tune-up on your car. These are skills that our grandparents honed and why they would consider it laziness and a waste of money to pay someone else to do for us.
Clip coupons. Take advantage on sales on the things you need. Shop at thrift stores and discount groceries. Buy off-brands. Shop smarter, and put your saving toward your three-month savings account.
If you have something you enjoy doing with your spare time, why not look for a way to earn money from it? Do you make crafts, art, or baked-goods? Offer them for sale to your friends and co-workers. Do you have a hobby like reading, listening to music, collecting things, or playing games? Write about your efforts and share them with the community on-line, using tools like Google AdSense to earn money for your work. The more income you generate doing the things you enjoy, the less you need to rely on an income from a job you do not like.
With that said, find a way to get a job you do like. We often think it cannot be better elsewhere, or that it is not worth the risk to make a move. No one deserves to be miserable. No one is born for the purpose of working for someone else to pay for things they do not need. Find a job you like. Pursue whatever training or education you need to do the thing you are passionate about.
If you are like the majority of people and carry some debt, you will feel some pressure to address that debt. Initially, you are building a savings account that is worth three months of your total monthly bills. This is your primary focus. This is a major step in our lives for many of us, requiring a real sacrifice on our parts to accomplish. Do not think to immediately add to that burden by trying to pay off your creditors at the same time. Some of us, when listing our monthly expenditures, included payments to creditors. Some of us did not, but do pay their creditors on a regular basis. The majority of us do not pay our creditors unless we absolutely have to. We were fools to borrow from them, and they were fools to loan money to us. Your first priority is you. Whatever your habits are regarding paying back your debts, do not change them yet. Instead, do not borrow any more money. In other words, if you are already comfortably paying your creditors, then continue to do so, but if not, then hold-off until you have your own savings.
Once three months of savings for necessities is achieved, you can begin breathing and living a little easier. Then it is time to address other issues, like getting out of debt. Pay yourself first, focus on small expenses to large, spend smarter, and create additional revenue streams. Life gets easier with a little financial cushion to pad your way.