I believe we all have good intentions to save money. I have met many people who struggle with money and not a single one of them has ever told me that saving is dumb or that they don’t want to do it. I’ve also observed a common problem where someone will save up money for a few weeks or a few months but then they are hit with a surprise expense and they end up cleaning out their savings. Of course there will always be surprises like vehicle repairs, higher than expected costs for utilities, medical and veterinary bills, or a check gets cashed sooner than expected. Unfortunately, this is when raiding savings becomes the only option. Once the surprise is dealt with, savings have to be re-built and then the cycle begins again.
Since our goal is to preserve savings (not raid them), I’ve outlined three ways to step out of the cycle and help protect the money we have managed to set aside.
- Put more “why” in your savings. Do you have well defined reasons for keeping a savings account? On the other hand, have you identified what your savings account is not for? Once my closest friend had to travel to Seattle unexpectedly for a family medical emergency. This made me realize I wanted to always have enough money saved up to travel in case something like this happened to my family. And even if somehow my family doesn’t experience any medical emergencies then these emergency savings could be used so my family doesn’t have to be burdened paying for my funeral (the most certain expense of all! yeah, dark, I know). After you have defined what these savings are for, also consider what you will not use them for. When unexpected expenses come up, it’s easy to rely on this money that’s just sitting around by promising yourself that you’ll refill it right away. But this is a trap! Don’t let yourself rely on your medical savings for vehicle repairs, for example, or you will find your self over and over again draining savings. Finally, don’t pick an arbitrary number for your target balance. Instead, figure out how much money you would need to cover those scenarios you identified above and base your emergency fund on that. Remember to account for covering your regularly scheduled expenses if you have to travel for a longer period of time.
- Go BIG. Most people start too small when figuring out their budget. It’s very common to only use monthly expenses as a basis for your budget. However, this is a surefire way to be “surprised” by every quarterly, semi-annual and annual expense you have. So go big! A better approach is to start with how much you spend annually and then divide by 12 to figure out your monthly budget. Remember to factor in Christmas and holiday spending, quarterly dues and subscriptions, vehicle maintenance/registration and insurance premiums. If you aren’t using an app like mint.com to track spending, you can usually export your annual spending history from your bank’s website. Annual budgeting is way underrated.
- Reduce fixed expenses. Variable expenses like food and clothes can be reduced quickly in a time of need, freeing up cash to help cover surprises, but fixed expenses aren’t as simple. Keep fixed expenses like rent, car and phone payments low so that you have the flexibility to use your monthly cash flow for emergencies. Ideally, your monthly income should be able to cover your fixed expenses, your variable expenses AND it should cover small and medium sized surprise expenses, that’s the dream anyway. If your fixed expenses are too high then you won’t have much wiggle room for your variable expenses. And if you don’t have much room for those variable costs then you definitely won’t have enough room to cover surprises. For each fixed expense you have, ask the question “How could I reduce this expense?” Pro tip: Type this into google for each of your expenses to see the amazing and creative ways that other people have minimized that expense.
Set up your finances for success and back away from your 401K, IRA, emergency fund and savings accounts. Leave the raiding to Lara Croft!
