Part 2 of the series. Now that you've created your Anti-emergency fund©, you are ready to set aside money in a Rainy Day Fund. Prevent an emergency from turning into a disaster by building your own Safety Net Savings!
Do you walk the high wire of personal finance? Is every month a balancing act that works only as long as the next paycheck arrives on time? What happens if that next paycheck doesn't arrive? The cause could be many things which you cannot control: an illness, a layoff, a sales slump.
If some unexpected event interrupted your next paycheck, would your household's financial balancing act come crashing to the ground? Would you be forced to resort to debt to fill the money gap?
Financial emergencies happen to just about everyone at one time or another -- and usually when you least expect them. Prevent an emergency from turning into a disaster by building your own Safety Net Savings. A safety net account is a reserve of savings that allows you to pay your normal expenses in the event of a sudden drop in income. And it helps avoid the need to turn to credit as a solution, which can result in a perpetual cycle of debt. Resorting to debt to cover lost income can mean years spent digging yourself out of debt.
The safety net account is the second step in a three-step savings program for financial fitness, that also includes your:
* Anti-emergency fund©: Money set aside monthly to pay for the non-monthly expenses that often get left out of our financial equation, such as quarterly insurance, car repairs, appliance replacement, holiday spending, taxes and the family vacation.
* Investment savings: Money set aside for retirement, college and other long-term financial goals.
Build Safety Net Savings by setting aside a specific amount from your paycheck each pay period, with the understanding that the money will not be touched unless a justifiable financial need arises. How large a safety net account should you build? That depends on your personal financial situation.
Are you self-employed? Or does your income fluctuate seasonally or due to commissions? Do you have a medical situation that could cause added expenses or loss of work income? You may need to plan for a larger safety net.
Are you well-settled in a stable job? Do you have plenty of sick leave or vacation built up? Does your company provide a good severance package in the event your job is eliminated? You may be able to get by with a smaller fund.
Most financial planners suggest a fund cover three to six months of normal and necessary expenses. The most important thing, though, is to just get started!
Use your monthly spending plan to determine the total of those normal and necessary expenses. You don't need to include everything from your monthly spending plan -- in times of lost income you probably shouldn't be thinking about new clothes, vacations or entertainment expenses. Do include costs of food, mortgage or rent, household utilities, credit payments and other necessary expenses (DON'T forget non-monthly expenses such as insurance, car maintenance, and taxes). Multiply that figure by three or six months -- or whatever period you've decided is necessary -- to arrive at your Safety Net Savings goal.
Now start saving -- emphasis on the "now!" One of my favorite phrases is "Save early and often". And pay your savings first. If you don't, you'll likely find some other way to use that money. If you think all your income is going toward necessary expenditures, try recording your spending. You'll probably see that some of the things you spend money on really aren't that necessary and may not even give you any real pleasure! Cut those out first and put that money toward your safety net.
Safety Net Savings is intended to be accessible in the event of an emergency, so don't sock it away in a long-term investment. Keep it in money market funds or short-term CD's. Of course, you won't earn much interest, but the point of the Safety Net Savings is to avoid having to use credit cards at much higher interest rates.
Safety Net Savings offers benefits even when you're not using it -- the benefit of security and peace of mind. Knowing that you'll be able to take care of your needs, and those of the people who depend on you, can relieve a huge mental burden you may not be aware you're carrying. Experiencing that sense of security may also make you feel more comfortable taking a few personal risks to enhance your quality of life, like changing jobs or starting your own business.
Remember, when you have a safety net beneath you, you can be a lot more fearless walking a tightrope!
About the Author
Cindy Morus teaches self-employed professionals how to beat their money into submission! She can teach you, too!