Learning to save, and making saving part of our DNA is crucial to building wealth. Saving is going to be the catalyst that allows us to build an emergency fund, make our budget work for you, and enable us to invest.
What’s an Emergency Fund and Why Do I Need One?
Everyone needs an emergency fund. This is money that you have available to deal with an unexpected expense that derails your lifestyle. This is to cover things like a job loss or an emergency car repair. It’s not for pizza at 3am.
Your emergency fund needs to be close by and secure. It needs to be somewhere where you can access it quickly. A bank account is fine but make sure you have checks or an ATM card so you can get to it in an emergency. You may want to keep it at home in a safe or another secure area. Don’t worry about maximizing the interest rate and certainly don’t invest this money. You want it close by and available.
When you have an emergency fund, you can feel secure with your budget and with your investments. An unexpected emergency expense can upend your budget. It may force you to miss a payment or to use a credit card to cover a planned expense. Either one will cost you. If you can cover the emergency expense with your emergency fund, you can stay on track. Having an emergency fund is incredibly important for your investing. We’ll talk much more about investing, but one of the key investing risks is having to sell securities (stocks, bonds, mutual funds) at an inopportune time. You want to be able to let your investments grow over time. You don’t want to be forced to sell to raise funds to cover an unplanned expense.
Ideally you will have enough money in your emergency fund to cover 6 month’s of living expenses. While this is ideal, no one expects you to be able to immediately set aside this much. Start small and add to your emergency fund regularly. Some is better than none.
How to Save
I read recently that 60% of Americans are living paycheck to paycheck. So how do we save? I’ll share some of the things I do, but would love to hear some of your suggestions. This is a tough one.
So for me, I make saving a competition. I’m competitive so that gets my blood going. I regularly shop for replacement car and home insurance, a cheaper cellphone carrier, free streaming services. You would be amazed at what you can save if you just hunt a little bit and ask for help. I recently changed insurance carriers and saved almost $1,000 per year. After making a half dozen calls, I sent my policy documents to several agents and told them I needed a better deal for the same coverage.
A few years back, my wife and I switched our cellphone carrier. The new carrier paid off over $1,000 that was remaining on our monthly cellphone purchase installments and we saved over $50 per month on our monthly cell phone bill. The carrier also offered free Netflix so we were able to cancel our plan and sign up for the free plan through the carrier. Saved us another $10 or so per month.
Saving Ideas
I was listening to a financial podcast a few years ago. They had a guest, a guy named Clark Howard. I was half listening until he started talking about how he changes his shaving razor every 7-9 months. He talked about how the blades really don’t become dull, they become less sharp as the blades deteriorate from the water and shaving cream. If you clean them and thoroughly dry them after each use, you can use them much longer. Sure enough, my next blade lasted 7 months without a nick. Previously I had been replacing my blade every 2 weeks or so as the good people at Gillette told me I should. Check out clark.com for more great ideas.
My wife is even better at this than I. She is a master at finding bargains that need a little TLC and making them like new. She frequents the consignment shops on a regular basis and gets some amazing items. Often she’s found new high quality sweaters and other clothing with the tags still on. She furnished a room in our house for under $100. A little elbow grease and a fresh coat of paint can bring someone else’s junk back to life.
Try It
“Try It” is one of the most powerful phrases. I have lots of ideas about how I can save more, but as soon as I proclaim “I am going to stop getting coffee at Starbucks!” the wheels come off. Instead, I now take the pressure off and say I’m going to try it. If it works out great, if not I’ll try something else. The Starbucks thing gets a lot of press. Financial experts like to use this as an easy way to save $6 per day and use it for savings. I recently read a story by a woman who said she tried this, realized after a month that she had saved quite a bit, but really missed her daily coffee. For her, this was a high point of her day. She tried it, it didn’t work for her, so she was going to try something else.
How Badly Do You Want to Save?
Another common theme in the financial world is to break expenses down to discretionary v. non-discretionary. I’m not a huge fan of this because if you really want to save, everything is discretionary. I read a story about a couple who lived in Chicago. They had lived with debt for years and decided it was time to do something about it. They moved to a smaller apartment outside the city and they sold both their cars and biked to work. That must have been quite a commute in winter. The point being that if you really want to save, everything should be up for discussion. Your mortgage payment may seem non-discretionary, but you could downsize. I got fed up with my cable bill and became an early cord cutter in 2009 and never looked back. If I want to watch a football game, I dance around a bit with a portable TV antenna until the over-the-air picture comes in. Takes a little effort, but it works. Well worth the hundreds I save every year on cable TV.
…and a Final Thought
Saving for something is a lost art. With easy access to credit cards and Buy Now Pay Later, it is easier than ever to get the thing that you want today and defer the payments. This appeals to all of us, which is why it is so successful, but think about saving for something before you buy it. Put money aside in an envelope, or open a new savings account and direct deposit a portion of your pay. When you’ve got enough money, pay with cash instead of credit. I can remember doing this as a kid. My parents couldn’t afford to buy me a new bike, so I got a paper route and put aside money every week. It was such a great feeling of pride and accomplishment when I finally had enough money, and my parents took me to the store to buy my new bike.
So to recap….It’s important to find ways to save and to put money aside. The savings will enable you to build an emergency fund, make your budget work, and allow you to start investing to build wealth. Saving isn’t easy. Find a way to make saving work for you and don’t be afraid to try new ways of putting money aside. Go to it, and please share any suggestions for saving tips that worked for you.