When mistakes happen, foolishness is to pretend they never happened; wisdom is to learn from them. Many people were completely unprepared for the 2008 stock market crash where hundreds of thousands of jobs were eventually lost, and many families faced financial emergency.
Too many people are living beyond their means. According to the U.S. Bureau of Economic Analysis, the personal savings rate in 2006 declined to its lowest level since the Great Depression. And while it has improved since then, it took a worldwide economic disaster and credit crisis to wake us up.
The economy is in recovery, but economic crisis is likely to happen again. There is no longer time to procrastinate the day of your preparation. Getting started is tough, but here are a few ideas to get you on the right path.
- Set aside $1,000.
It’s not much, but it’s a start, and it will do until you figure out your finances. You can accumulate that amount in just three months by stashing away just $10 a day. This might not sustain you for long, but in a financial emergency every little bit counts. - Eliminate credit card debt.
Not temporarily ⎯ FOREVER. Financial guru Dave Ramsey suggests paying off your credit card with the smallest balances first (small victories) and growing those payments towards your larger balances. - Get a grip on fluctuating monthly expenses.
Set up a monthly budget with day-to-day expenses less than 65% of your take-home pay. No matter the amount, living off this percentage of what you earn makes saving that much easier. - Save wisely.
You now have 35% of your total income to save, so have a plan for putting it away. Some experts suggest 10% of that go directly into your retirement account before you ever see your paycheck. The remaining amount should be automatically deposited into an investment or savings account. Money out of sight is money out of mind, so you won’t be tempted to spend it. - Set up an emergency fund.
Once your savings plan is automated, you should make a goal to keep the equivalent of three months of expenses in your checking and another three months in your savings. You might consider carrying 10% in cash for financial emergencies that occur as a result of natural disasters; some emergencies prevent access even to wisely invested bank funds.
Preparing for a financial emergency is easy to overlook until it’s staring you in the face. The more you save, the more peace of mind you can achieve, and if you invest it wisely, that money will grow on its own.
What is your favorite investment/savings strategy, and how has it helped bring you peace of mind?