Back to Basics: Ready for an Emergency?

Back to Basics: Ready for an Emergency?Note: This week I am concluding my “back to basics” series.

Over the past few weeks I have talked about regaining control of your money by living on a budget, keeping track of your money, and learning to pay yourself first.

Today I am finalizing the series by taking a look at why we need to have an emergency fund.

Ready for the Storm?

Growing up on a tropical island, living through tropical storms and hurricanes was part of my way of life. As a matter of fact I distinctly remember hurricane Eloise rudely intruding on my 8th birthday in 1975.

In Puerto Rico we always knew the drill: Between June 1st and November 30th we just had to be ready for the potential of lots of rain, loss of power, and interruption to the water service.

This meant we had to stock on non-perishable food items, drinking water, batteries for the radio (to keep up with the news) and flashlights and candles. It also meant making sure you had enough gas in the cars.

The drill did not change every year because we knew the possibility was very real that we would be hit with a storm. However, it also never failed that people failed to prepare.

It was always entertaining (and a little sad) to see the news reports on TV about people rushing to the super market to stock on provisions the day before the storm was scheduled to arrive or in some cases on the day the storm was scheduled to hit.

You would see the anger and desperation of the people. I usually thought: Don’t you know where you live? Have you not been watching the news?

Why is this a surprise and why did you wait until now?

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The Application to Your Money: Be Ready for an Emergency

When it comes to your finances, we can become guilty of the same lack of readiness. We know life happens and we will run into some difficulties.

I am not trying to be pessimistic but realistic. Emergency situations will happen to all of us. So the question is: are you ready for an emergency?

A 2011 survey by the National Foundation for Credit Counseling (NFCC) reveals that 64% of Americans don’t have $1,000 in savings to cover an emergency situation.

And in spite of some improvement of the last couple of years, American’s savings rate still lags considerably compared to other nations.

We are saving more than a couple of years ago (around 4.1%), but not nearly enough. So what to do about it?

First let’s define what an “emergency” situation is with regard to your finances. This would be an unexpected expense outside of your monthly budget.

Some examples include:

  • Major Car Repairs
  • Home Repairs
  • Appliance Replacement
  • Uncovered Medical Expense

So how much money do you need in your emergency fund? Here is what I would recommend:

  • Beginner’s emergency fund: $1,000
    • $500 if annual household income is less than $20K.
    • Do this, before you start paying down on your consumer debt.
    • Most typical “emergencies” can be handled with a beginner’s fund.
  • Full emergency fund: 3 to 6 months of monthly expenses (based on your monthly budget).
    • Do this, after you pay off your consumer debt.

Decide today that you will be ready before the storm hits.

So What?

Having an emergency fund, even a beginner’s emergency fund, will help you in a couple of ways.

First, it would keep you from going further into debt. You would not have to borrow money to cover the expense.

Second, it would help you stay within your monthly budget. You would not have to make a decision on which expense to cut this month.

Finally, and as a result of the first two, you would have peace of mind. The Bible says that a man who saves is a wise man (Proverbs 21:20).

So do what you must do today to complete your emergency fund. You might need to work extra, you might need to cut back on some fun items.

But make sure you are ready for an emergency before it happens.

“he who spends more than he earns is sowing the winds of needless self-indulgence from which he is sure to reap the whirlwinds of trouble and humiliation.”
From the “The Richest Man in Babylon” by George S. Clason

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Question: Could you deal with an emergency today without going into debt?

Back to Basics: Pay Yourself First

Back to Basics: Pay Yourself First

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Do you get a lot of e-mail messages every day? I do.

On an average day, I receive between 100-150 e-mail messages in my inbox at work.

In order to keep my sanity, I had to develop an approach to maintain my inbox at a manageable size.

I had to figure out a way to prioritize my time, which is the most important currency in my work day and is also finite.

Managing your money comes with the same limitations as time. Like time, money is finite.

And like time, if you don’t purposely manage it and set the right priorities, it will slip away.

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There is so much income you have every month and you have to decide where it goes each month.

You must learn to pay yourself first. This means that your money should address the most important items for your household first.

In order to pay yourself first, you need to protect the four walls, plan ahead, and have some fun.

1. Protect the Four Walls

These are the most important areas of your monthly spending plan. These areas cover the basic necessities of your family.

The four walls are:

  • Food: Make sure you have taken care of providing what’s required to feed your family and yourself.
  • Shelter: Keep your rent or mortgage payments up to date. You need to have a roof over your head. Also, under this category come your utilities (electricity, water, gas, basic phone service). Don’t let the lights get cut off!
  • Transportation: You need to have a way to get to and from work and other places you and your family need to go. This includes car payments (if you have them), putting gas in the car, and basic maintenance like regular oil changes.
  • Clothing: Ensuring basic clothing for you and your family is covered in your monthly budget.

Think about this:

  • if you have a roof over your head and,
  • if everyone is fed and,
  • if no one is going to cut off the electricity or water and,
  • if you can get to and from work, and you have basic clothing,

You can live to fight another day.

When the home front is protected, you can then focus on addressing the other elements of your financial plan like paying off debt or investing for the future.

2. Plan Ahead

Besides providing for basic needs, when you pay yourself first, you make savings a priority.

If you still have consumer debt (credit cards, car loans, student loans, medical bills, etc.), you need to make sure you build a beginner’s emergency fund of at least $1,000 ($500 if you make less than $20K a year).

If you have paid off all of your consumer debt, then you need to be working on building a full emergency fund of 3 to 6 months of expenses.

Once you have that full emergency fund built, you can then move on to investing for long term goals such retirement and paying for college for your kids.

3. Have Some Fun

You know what? When you are going full speed ahead in getting your money under control with a budget and paying off debt, it can feel like you just can’t afford to have any fun.

But you need to make room in your budget for some fun that’s appropriate for your current financial situation.  Put a line item in your budget labeled fun money”.

This should be a small percentage (maybe 1-2%) of your overall budget. This is an amount that’s designated for you to do anything you want.

My wife and I each get the same amount of fun money in the budget. My fun money goes mostly to help Starbuck’s.

The fun money is the oil that will keep your financial management engine running well.

Now What?

Financial success is not accidental. You have to take charge of your financial destiny.

You get to set the priorities, you get to tell your money what to do. Don’t leave it to chance and don’t think anyone else will do it for you.

Pay yourself first!

“The plans of the diligent lead surely to advantage, but everyone who is hasty comes surely to poverty.”
Proverbs 21:5 (NASB)

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Question: How will you start to pay yourself first?

Back to Basics: Keep Track of Your Money

Back to Basics: Keep Track of Your MoneyAs I discussed in last week’s post, I want to spend the next few weeks going back to basics on how to get our finances under control.

In my experience, one of the most important skills to develop with your finances is the ability to keep track of your money.

In order to gain control of your money, you need to understand what’s happening with it. How much comes in? How much goes out and for what?

How much money have you saved? How much money do you owe and to whom?

If you can’t answer these questions, you don’t have the level of understanding required to win with your finances.

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So how do you get there? Here are 4 basic, easy things to do to keep track of your money.

The key is that you have to do them consistently:

1. Record Your Expenses

You need to keep a register of where your money is going. You can use the old fashioned approach of your paper checkbook register, computer software.

In many cases, you might be able to do it by using the on-line features of your bank or credit union.

Even if it is a few bucks for a venti latte or you just took $20 out of the ATM, record it and ensure it is categorized properly (e.g., utilities, gas, dining, groceries, etc.).

2. Keep your Checkbook Balanced

Every month, your bank or credit union will provide you with a statement of your checking and savings accounts.

Spend a few minutes balancing your checkbook. It does not take long and it will help you know where you stand with your money.

You can also avoid overdraft fees, find expenses you might have forgotten to record, and also discover erroneous charges due to bank errors or worse, erroneous charges due to identity theft.

The instructions for balancing your checkbook are usually included on the back of your statement.

Do it every month!

3. Maintain a Net Worth Report

You need to know what is the value of your assets (what you own outright such as savings, retirement accounts, property), and your liabilities (your debts such as credit cards, car loans, student loans, and mortgages).

Your net worth is the difference between your assets and your liabilities.

Most financial management tools provide you with an easy way to track your individual assets and liabilities so you can keep track of your net worth.

4. Establish a Written Budget

As you begin to habitually do the actions above, you will begin to gain great insight into where your money is going.

This will help you greatly as you tackle the task of living on a budget.

Remember, a working budget will be the most powerful tool in your arsenal.

This is a simple blue print for managing your money: how much money comes in (i.e., your income) and how much money goes out.

The key is that you have to do it every month before the month beginsYou have to plan it and live it!

As usual, it is always up to you to change your ways. You have to decide that this is important enough for you to do it.

“Be diligent to know the state of your flocks, and attend to your herds;”
Proverbs 27:23 (NKJV)

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Question: What tools are you using to keep track of your money?

Back to Basics: Regain Control of Your Money with a Budget

Back to Basics: Regain Control of Your Money with a BudgetHave you ever had one of those weeks where you don’t know if you were coming or going? The sense of being totally out of control with your life? It happens to all of us.

The feeling of being out of control is familiar to me because that’s how I used to feel about our finances a few years back. Even though we had a great income, I could not figure out how to maximize it for our household.

Basically money came in and went out and I could not tell you where all of it went. Sure, we took care of the major things like mortgage payments, food, utilities, etc.

But there was also a lot of waste. Things had to change because I was tired of being out of control and we had nothing to show for all the money we made and all of our efforts to earn it.

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Over the next few weeks here on the blog,  I will be spending sometime going back to basics for winning with your money.

And today, we will start with how to regain control of your money with a budget.

We discovered the budget is the best tool to regain control of your money. I know that to some of you that it is an offensive word, a reminder of a strait jacket or something that limits your fun.

Or you might think: “I have tried that and it did not work for me”. Or you might think: “it is too hard to do it”.

But I will promise you this: the key to regaining control over your money, the key to maximizing the efficiency of your income is a working budget.

It was this way for my wife and me so I know it can work for you as well. You can do this!

What is a Written Budget?

Basically a written budget:

  • Gives you a blueprint to help you manage and control your finances.
  • Provides you with a way to objectively and comprehensively discuss money matters with your spouse (or accountability partner if you are single).
  • Will help you live on less than you make.

The budget is the plan for your money.

How to Establish a Budget?

  • Keep it simple (you don’t need an Excel spreadsheet with 17 tabs!). A yellow note pad will suffice if you just do it.
  • Prepare it every month before the month begins. Every month is slightly different.
  • Lay out all of your monthly income.
  • Lay out all of your monthly expenses.
  • Spend every single dollar “on paper” and “on purpose”. In other words, allocate every single dollar to a spending category.
  • This is what is called a “zero-based” budget.

Income – Expenses = Zero

Important Reminders

  • Do it every month. Plan it and live it. Keep up with your spending.
  • Work with your spouse (if single, find an accountability partner).
  • Use your budget to gain insight into your spending patterns.
  • Prioritize giving.
  • Focus on needs, not wants.
  • Adjust as necessary. It will take you about 90 days to get things under control with your budget. But you will do it!
  • Stay with it!!!!

“A budget is people telling their money what to do, instead of wondering where it went”.
John Maxwell, Author & Motivational Expert

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Question: What’s keeping you from living on a budget?