Has anyone ever told you to “pay yourself first”? “Pay yourself first” means you put a little money in to savings for yourself before paying any of your bills or buying any household necessities. A brilliant idea, but some folks might not take ‘hold of it because they may feel it is not very practical, especially if they are sinking in debt.
However, you do need to set something aside for emergencies. It is very much necessary to do that, if you want to get out of debt and stop relying on plastic to get you through financial crisis. But don’t go overboard and ignore bills so that you can build up your savings. That will create a financial crisis instead of avoiding one!
In the “pay yourself first” model, they stress that you need to set aside something, anything, before paying any other bills. Even if it’s just five dollars. One dollar. Doesn’t matter. Just start saving.
Most people have a basic idea of how much money they make and what their expenses are. We are going to dive deeper later on the expense side of the equation. But for now, think about your rough estimate of expenses. How much money do you think you realistically can tuck away for a rainy day? $100 a month? $50? If you can do more, fantastic! If $50 is hard for you, how about $10? Feel like you have absolutely no money to tuck away in to savings? Can you do a buck? One dollar? Just to start getting in the habit of saving? That’s all it takes. (We will talk about where to find extra money in your budget another day).
Do you have a savings account already? If so, great! If not, you might want to think about opening one. You can open a savings account at any bank or financial institution. Credit Unions are a great way to start as well. If you have a tough time getting in to a bank, due to past history, or if you are not at a point where you can trust a financial institution, then just start tucking money away somewhere at your house. Somewhere hard to reach; especially if you have a habit of digging in to your savings when you run short.
Let’s talk about the nuts and bolts of savings. There are a few different layers to savings. You have your “put and take account”, your “emergency savings account” and your “savings” account. Each layer, each account, has a different purpose.
- The Put and Take Account – this one is exactly what it sounds like. You put money in with the explicit purpose of taking it back out again. This account is used to fund bills that you don’t pay monthly, such as insurance, taxes and heating expenses, i.e., fuel or propane. It should also be used for expenses that come around once a year, such as birthdays, Christmas, or a high school graduation. This is how it works:
If you pay your insurance every six months, and it is $600, then every month you deposit $100 in to the “put and take” account. At the end of six months, you have enough to pay your bill. If you are saving for Christmas, and you typically spend $1,200 on Christmas, then every month you deposit $100 in to your “put and take” account. Sweet, right? Easy. This way, you aren’t skipping another bill to pay that insurance, or putting your Christmas on credit cards. I find that a separate checking account from the one you use on a daily basis works well for a “put and take” account. Or, if you don’t use checking accounts, you can simply use an envelope, and tuck it away somewhere that is hard to get to.
- Emergency Savings – This one is pretty self-explanatory. An emergency savings is used to save for emergencies. If you struggle with debt, this one is a ‘must have’. Why? Because when the furnace goes out and you need to replace it, you will have the money set aside, rather than rely on credit.
To start out, set aside what you can reasonably afford. Don’t scrimp on another bill because you are going to become a savings warrior. Pay your other bills, put your monthly amounts in your put and take account, and set aside a reasonable amount for your emergency savings. If you can only afford $5, great! Put $5 aside. If you can do more, fantastic! The point right now is to start learning to save. That is the goal. To make saving a regular habit for you. The point is not to kill yourself trying to do it.
Budgets should not be too painful. Self-sacrificing, occasionally. 😉 But it needs to be liveable. If you create a budget that is unrealistic, if you set up a savings plan that is unrealistic, not only are you going to hate the whole process, but you won’t stick to it. And then it is so painful that you will never try again. So let’s make this easy for now. Put in a small amount of money that you can live without pretty easily, and we will talk later about how to find ways to increase that amount.
I find that another checking account works well for this layer of savings as well. Actually, I personally use the same checking account for my “put and take” account as I do my emergency savings. I just know in my own head how much I have in my “put and take” account and how much is for emergencies. I like the check book though because then I can write out checks directly from this account, or use a debit card. No transferring required. But a savings account works beautifully too. It’s all personal preference. (A manila envelope tucked away safely at home works too, but when you start setting aside this much money, fire or theft is a risk…..)
- Savings – This is the final layer of savings, and maybe, the “real” layer. This is a savings account for the long haul. You do not take out of this one. Ever. Until you retire. Or buy a house. Or any long, long term goal you may have.
I would advise that you do not even start saving for long-term goals (retirement, new house, lake house, new car, boat, motorcycle, what-have-you) until you have mastered the “put and take” account and the emergency savings account. Until saving has become a regular habit, don’t worry about this layer of savings.
Also, I would suggest you work on getting out of debt before you start tucking away money for a new boat. 😉 It just seems practical. But once you have reached financial stability, start tucking money away in an actual savings account. At a bank. Where you can gain a tish bit of interest. Where it’s very very hard to touch. In fact, some banks have penalties if you take money out of it too often in a certain time period. So it’s a good place to be.
And again, start small if you need to. The idea is to set up the habit. Once you save on a regular basis, and are feeling financially comfortable, or at least you are to a point where you can handle a little self-sacrificing, then increase your amount. And continue to do so over the years, as you are able.
And that’s it! Saving in a nutshell. It’s easier than most people think. And almost painless. If you struggle with debt, or you struggle with making ends meet; if paying your bills is hard for you, and you don’t see how you can possibly start saving, just start small. That’s all it takes. We don’t need to save a million bucks here. We just need to start the habit. That is the goal.
We will talk more on where to find extra money to save another day. You’d be surprised at how you can tuck money away!
~”Roughly a third of American adults don’t have any emergency savings, meaning that over 72 million people have no cushion to fall back on if they lose a job or have to deal with another crisis, according to a survey released March 31, 2015 by NeighborWorks America, a national non-profit that supports communities.
Ideally, Americans should be setting aside 15% of their gross income to prepare for emergencies, as well as for retirement and other goals, according to financial experts.
When it came to financial priorities, only 1% of adults said shoring up an emergency fund was a critical financial goal vs. 5% who agreed a year ago.”
– from an article taken from USA Today