Take charge of your finances and stop overspending
In times of crisis – the transmission goes out, the mini tornado brings down the 100-year-old tree in your backyard – you don’t want to be shaking pennies out of a piggy bank to pay unexpected bills. Having a financial safety net in place can ensure that you’re protected when the need for extra cash is most urgent. One way to accomplish this is by setting up a cash reserve, a pool of available funds that can help you meet emergency or urgent short-term needs.
How much is enough?
Most financial professionals suggest that you have three to six months’ worth of living expenses in your cash reserve. However, according to Bankrate.com, only 22 percent of Americans have enough money saved to cover six months of living expenses. Even more distressing, 29 percent reported they had no emergency savings at all.
Building your cash reserve
If you haven’t established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:
1. Track your spending
Before you can begin saving money, you need to know how much you’re spending. For one month, keep a record of every expenditure. Yes, that includes your Wednesday morning latte’ and chocolate éclair, as well as Friday evening ice cream cones for the kids. Next, determine your fixed expenses such as mortgage, utilities, insurance, and then look at your needs for other expenses such as food, gas, entertainment, etc. The Federal Trade Commission offers this Budget Sheet as a tool to determine how much money you spend each month. As you track your spending patterns, ask yourself what you can pare down to put more money aside.
2. Make a budget
Once you have a good idea of how much you are spending, you can build your budget. Setting a budget can be time consuming and hard but it’s a sure path to achieving your savings goals. Determine a set amount for weekly expenses and challenge yourself to stay within this budget. Also consider using an app that acts as a money manager and expense tracker that helps you stay on top of your bills and finances. Top rated apps include GoodBudget or You Need a Budget.
3. Save with purpose
Have a clear reason for saving – whether it’s to build up your emergency funds, a trip to the wine country or renovating the kitchen, having a purpose can be a powerful motivator especially if the whole family is vested in the outcome. Wondering how long it will take you to save for your dream trip – check out one of Advia’s Savings and Financials Calculators. If you’re feeling really motivated, you can even calculate how long it will take you to save and become a millionaire!
4. Make it automatic
Save more by making a payment to yourself first and work towards saving 10 to 15 percent each pay period. It’s also easier to save when you don’t have to remember to transfer funds every time you get paid. Use an automatic direct deposit system that allows you to divide and deposit your funds into savings and checking accounts. Once you get used to the money automatically going into savings, you never even miss it.
5. Evaluate your plan.
Now that you have a plan in place, you should evaluate whether it’s working. Have you reduced your spending? Can you save more? Also, with an eye to the future, remember that your personal and financial circumstances change often–a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.