SIMPLE Personal Finances
Plan to be Financially Stable and Secure
P Stands for Plan
Back in 2017, I began my series of blogs on SIMPLE finances: Spend, Invest, Manage, Plan, Limit and Eliminate. Here we are, almost in mid-2018 already, and I am on P is for Plan. Apparently, you can’t rush quality, right?
If you are keeping score at home, you were probably expecting the S in SIMPLE to stand for Saving for emergencies, right? After all, paying yourself first is the first rule of personal finance, and that is not just in my book. That is pretty much the case in every financially successful and stable household. Save for the expected and save the unexpected. And Save starts with “S,” so how crazy was I to identify S is for Spend? I hope you will forgive my impertinence.
I like to do the unexpected. Many of us enjoy being spontaneous. It can be refreshing and enlivening. However, dealing with unexpected financial challenges is rarely a welcomed thing. In fact, dealing with unexpected expenses is one of the main reasons households get into debt that becomes so overwhelming that it leads to bankruptcy.
Our own surveys of bankruptcy filers over the past decade or so have revealed that job loss and income reduction are by far the main contributors to the financial struggles of bankruptcy filers. Other major unexpected financial hardships come in the form of medical debts, divorce expenses and the loss of an income-earning spouse.
So, how are you supposed to eliminate these financial risks from your household? You can’t. Risks will always exist. Much of life, try as you might, is beyond your control. Still, putting together and putting into action a plan to deal with unexpected events is NEVER a bad idea. If there were a fire in your office building, you had better hope you know the exit plan. When traveling by plane, you may not listen as intently as you should to the flight attendants during their presentation of an emergency plan, but you are likely grateful the airlines have some sort of contingencies for emergencies.
P is for Plan. And by Plan, I mean, preparing for the expected as well as the unexpected.
Identify Your Savings Needs
First, identify your expected savings needs. A savings need is an amount of money you must have for a future expense or purchase that you cannot come up with through a single paycheck. For example, if you are planning to go on vacation this summer, it will likely require more travel money than you can come up with from a single paycheck. Consequently, preparing for a vacation is an expected savings need. From each paycheck between now and then, you can figure out how much you will need to set aside in a savings account so you will be financially prepared for vacation. Examples of other expected savings needs to include birthday and Christmas gift giving as well as back-to-school shopping.
What about unexpected savings needs? How do you prepare for them, since they are myriad? Some are unpredictable (accidents, injuries, job loss) while others are inevitable (car breakdowns, home repairs, schooling costs, appliance and furniture replacement). The answer is simple: save. From each paycheck, place 10% to 15% into a savings account in order to build a reserve fund for when you need it.
Manage your expected and unexpected savings accounts
Too often, when I am counseling individuals or couples about money management, I find that they have either no savings account or just one. If they have one, well, that is a great start. However, if they start contributing gift giving money, vacation savings, and savings for emergencies into the same account, I can guarantee that when summer comes around, it will ALL be used for vacation and travel. Such is human nature.
Instead, consider setting up a separate savings account for each goal: one for emergencies, one for vacations and travel, one for holiday and gift giving, one for your next vehicle, etc. There should be no cost at your bank or credit union for these additional savings accounts. Next, set up automatic transfers to those savings accounts to happen a day or two after payday. You might also check with your employer to see if you are able to set up an additional direct deposit into your savings accounts.
The amount is less important than commitment
Opening multiple savings accounts can seem overwhelming to some. If you want to talk about overwhelming, let’s consider the typical recommendation by “experts” to have 3- to 6-months’ worth of living expenses saved up for emergencies. For the 60% of American households living paycheck-to-paycheck, even one month seems impossible, let alone three to six.
Instead, do not start with an amount in mind but with a commitment. If you have struggled to build an emergency fund in the past, then commit to save something – anything – from EVERY source of income you get. That includes salaries, extra work, birthday or Christmas gifts, and unexpected refunds. Even if it is just a $1 savings contribution, that is something. After all, a journey of a thousand miles begins with a single step. Yes, a single dollar can be the start of something monumental in your personal finances. If that seems too easy, start with 1% of everything you get. After a couple months, bump that up to 2%. Then, 3%, and so forth, until you are at 10% to 15% of your total household income.
These recommendations may not be ideal for everybody. If you do not think they will work for you, then make some other plan. Otherwise, try them. Not planning does not mean you do not have a plan. If you fail to plan for your financial future, your plan is to remain financially unstable and insecure.
P is for Plan. You have one, whether you like it or not. Make sure it is a plan you can live with.