Dear Financially Famished,
A lack of cash in your savings account can lead to a decline in your overall financial health. Not good. Here’s some more food for thought…
Studies show that the average American only saves 2-5% of their gross annual salary. For an individual earning $40,000/year, this equates to an annual savings of just $800-$2,000. That’s pretty pathetic. What will you do if you’re laid off (which isn’t too unlikely in this economy)? What if the car breaks down? What if you have sudden, unexpected medical expenses? What will you do when you have no emergency fund to fund your emergencies? Oh, let me guess- you’ll go into debt.
Genesis 41:1-36 is an excellent illustration of the importance of saving. Joseph interpreted Pharoah’s dream as a foreshadowing of famine. He instructed Pharaoh to save 20% of all the grain during Egypt’s 7 years of abundance so they would survive the impending 7 years of famine. What a novel idea! Imagine how much more peace you would have in your life if you used your years of abundance to prepare for life’s imminent emergencies. NEWSFLASH: We will all experience droughts in our life every now and then. Will you be prepared or will you panic under pressure? You must start living beneath your means if you want to get your head above water. Proverbs 27:12 says,
A sensible man watches for problems ahead and prepares to meet them. The simpleton never looks, and suffers the consequences.”
Which one are you?
Six to nine months worth of your expenses is a very nice cushion to have in your cash reserves. The best way to build this emergency fund is by saving a percentage of your gross income- ideally, 10%. If you can’t start there, try saving 5% of your gross paycheck, and work your way up. Start somewhere or you’ll go nowhere.
Here are some other practical tips for building your cash reserves:
1. Don‘t wait until all your debt is paid off before you start saving money. Yes, you will one day be debt free, but you also won’t have a cash reserve. So, what will you do when you have another emergency? Yep, you guessed it- you’ll go right back into debt. Break that cycle of bondage and start saving money today!
2. Save systematically. Begin saving a specific percentage of each paycheck and do this automatically (either through direct deposit from your paycheck or via systematic withdrawal from your checking account on each payday). Small pills are much easier to swallow. Before you know it, you’ll have a chest of medicine to treat your famished finances when times get hard.
3. Cash is king! Cash reserves should be just that- cash reserves! Stocks, mutual funds, annuities, IRA’s, employer-sponsored retirement plans, etc., are not savings vehicles; they’re investments/investment vehicles. You must save in a liquid, readily available account that is not taxed/penalized when funds are withdrawn. Credit cards, home equity loans/lines of credit, payday loans, personal loans, student loan refunds, etc., are not cash reserves either; they’re debt instruments. Your savings account must earn you interest, not charge you interest!
4. Save for feast and famine! Save for emergencies as well as the stuff you have feasted your eyes upon: a house, car, vacation, wedding, etc. These funds should be held in a separate savings account so you don’t exhaust your cash reserves when you’re ready to make your purchase. Yes, you must plan ahead for these expenses as well!
For which of you, intending to build a tower, does not sit down first and count the cost, whether he may have enough to finish it; lest perhaps, after he has laid the foundation and is not able to finish, all those seeing begin to mock him, saying, This man began to build and was not able to finish.” (Luke 14:28-30)
5. Set a goal, stick to it, and monitor your progress. How much would you like to have in your savings account by this time next year? Now break that goal into quarterly goals and monitor your progress along the way. If you find yourself getting off track, you’ll be able to make adjustments in your spending before things get out of hand. And by all means, write it down! You are much more likely to reach a goal if you simply write it down. Write the vision and make it plain!
A well-fed savings account will create a storehouse of resources to help you survive life’s emergencies. Follow the steps outlined above and you’ll be well on your way towards financial fitness. Here’s the bottom line: if you don’t save for your future, you’ll bankrupt your future. Time for your dollars to start making sense.
~The Practical Chick