First off, my apologies for the unreasonably long break between the first article in this series and the second one. I’ll try to make sure subsequent articles appear more regularly.
If you need to, go back and reread the first article. Basically the point was that you have to make enough money to not only cover your expenses but also to have some left over to save. Save. That’s right, save. You MUST be able to save money if you plan to live a successful financial life. Why is saving so important? Well, because you need savings for a lot of reasons. You need savings to cover you in case there are dips in your income. You need savings to cover you in case you or your partner, if you have one, or both of you lose your jobs or your source(s) of income. You need savings to buy that car or house you want. And then when you get them, you will need savings to pay for needed and unexpected repairs. You need savings to cover your deductibles because insurance won’t cover everything. So, you need savings – money – so that when life takes unexpected twists and turns, you won’t be caught off guard.
So, now that you understand how important savings are, the next questions are how to save and how much to save. If you are an employee who receives a paycheck on a regular basis, the best way to save is to have your paycheck automatically deposited into your checking account, then transfer part of that amount to your savings account. Easy-peasy-lemon-squeezy! If, however, your income is sporadic or fluctuates, it will be a little harder to save because you will have to be more disciplined. That is, you may have to deposit your income into your account yourself. And it could be very tempting to take some of it before you save. Well, tough noogies, because oftentimes you gotta do whatcha gotta do, and this is one of those times.
Before moving on, I mentioned checking and savings accounts. Please, please, open these accounts at a financial institution, and don’t use check cashing places or services that will cost you money just to get to your hard-earned money. There are credit unions that you can join. Most require only a $5 deposit to open a savings account and don’t require a minimum balance to be held in a checking account. How great is that!
OK, so now, how much should you save whenever you get paid or receive some income? The amount depends on your circumstances, but generally speaking you should save the greater of $20 to $100 every time you get paid if you receive a paycheck on a regular basis and 10% of your take-home pay. The key is to save the same amount each time you receive income, either a fixed dollar amount or a percentage of what you save. If you save that amount on a regular basis, soon you won’t even notice the missing money. But you will notice that your savings account is growing. Whoo-hoo! Look at you doing the right thing.
I mentioned that savings have a lot of purposes, the main is to create a cash cushion so that you will be able to weather the financial storms that will come up in your life. But at times you will also be saving to spend, like when you’re saving up for a down payment on a car or a house. And this is also an appropriate reason to save and a good use of your savings.
So, overall, what is the total amount you should have in savings? Again, that’s very dependent on your financial circumstances, but a rule of thumb is that your savings should equal the sum of at least six months of living expenses, any deductibles on homeowner and vehicle insurance policies, some reasonable amount for unanticipated repairs (because stuff always breaks when you can least afford to fix it), and the equivalent of six months of premiums that you pay for homeowner, vehicle, and life insurance policies.
After doing the math, you will see that you probably need savings in the thousands of dollars. If you have a partner, children, a house, and one or more vehicles, your savings cushion may be $20,000 or more. A pretty tall order, but don’t worry. You are going to build up to that amount over time. The most important thing is to just get started.
Savings done! Next up, insurance, that thing we love to hate but love to have when we need it.
