In a recent article published by The Atlantic, The Secret Shame of the Middle-Class Americans, an alarming statistic emerged from a Federal Reserve Board survey conducted in 2013. Forty-seven percent of those surveyed said they could not come up with $400 to pay for an emergency. In order to do so, they’d need to borrow money or sell items they own.
Why aren’t we saving enough money to cover even the smallest emergencies?
If you think about it, there are so many money emergencies in life that cost well over $400. What if you were in a car accident and needed to come up with your deductible? Or, would you be able to afford a last-minute plane ticket to visit a sick relative or friend? Those cost well north of $400.
I have an intimate glimpse into the finances of couples and individuals every day. Saving money isn’t just a challenge for people who live paycheck-to-paycheck. I’ve also seen many people who make more than $500,000 a year and have very slim savings for emergencies. The greatest cause for the lack of emergency funding is that saving money almost always comes last for people on the financial priority list. It’s not the first thing they think of when they receive a paycheck, but an afterthought at best.
Paying yourself should always come first. And I don’t mean paying yourself to go spend money on toys and fun outings. I mean paying yourself to save for the future and unexpected – especially if you have a spouse and children who rely on you financially.
If you’re part of the 47 percent of Americans who don’t have $400 easily accessible, I’m not here to shame you. I am, however, here to tell you what needs to be done to improve the financial situation you are in. Even if you aren’t part of that 47 percent but know you should be saving more, these tools will help get you on the right track.
Saving money is all about taking small steps to improve your finances, which then lead to big changes in the future.
Know Your Numbers
Whether you’re living paycheck to paycheck because you have to or because your spending is out of control, the first thing you need to do is understand how much you are spending each and every month on things like eating out, grocery shopping, going to the movies and getting cash out of an ATM.
Knowing your numbers is a vital step in finding and driving savings into your Emergency Fund. When you know how much you are spending each month on all of your expenses, it’s very easy to find small, and sometimes significant, ways to cut back, shore up any leaks in your finances and take charge of how you are spending your money.
Knowing your numbers works hand in hand with your budget. They are like besties who can form a bond that is magical to your bank account. The process is simple, yet can be laborious the first few times you attempt it.
Step 1: At the end of the month print, off your bank statements, credit card statements, and any other account that you used to buy stuff during that month.
Step 2: Grab a beverage, a nice snack and a few colored highlighters.
Step 3: Color-code that statement for categories like groceries, dining out, ATM withdrawals, entertainment, credit card payments, shopping, and more. Every single penny that you spent last month should be in a category.
Step 4: Add up each of the categories, and head down to “work your budget” below.
Work Your Budget
The number one question I get asked is, “how much money should I have saved?” My simple answer is – as much as you can. Now I realize that is a bit of an elusive answer, so if we’re talking numbers, my recommendation is to save 3-6 months’ worth of your fixed expenses in an emergency fund. Savings is a super important element to your budget, one that often gets left off because you have so many other places to put your money.
No one likes to budget. I’m right there with you. However budgeting is a very important part of achieving your financial goals. I’ve seen clients turn their entire financial situation around in a matter of 30 short days just by employing a new budgeting strategy. They’ve been able to discover savings that were just hiding out in their bank account. Over time, their dedication to budgeting could help them pay off large amounts of debt, save for a down payment on a home and even launch a business.
The problem is that most people teach you to budget using just one column. This doesn’t work. What I like to teach people is to budget using a 2-column system:
Column 1- What I Think I Will Spend (your traditional budget column)
Column 2- What I Did Spend (where the magic happens)
Column 2 is the “a-ha” column. When you’ve finished knowing your numbers, all you need to do is plug them into column 2 and then compare and contrast how much you budgeted against how much you spent that month. You will start to see trends and patterns that emerge in your spending habits. This gives you power to make proactive changes to build your savings.
Now, there are all sorts of apps that can do this magic for you. A few favorites are YNAB, Level Money, and Mint. At the end of the day, by incorporating a strong budgeting system (meaning you do this each and every month), it’s possible to find hidden potential savings opportunities in your bank account that you can redirect toward your goals. That’s when you start building up that strong emergency fund, or, even better, when you start moving past an emergency fund to saving for retirement or investing in the market to build your wealth.
Get Some Life Insurance
Life insurance may seem like a surprising addition to this list. That’s because if you don’t have $400 for an emergency, yet you have a spouse, children or someone else in your life who relies on you to help pay the bills, what would happen to those loved ones if you were to die? If you’re single with no debt, you most likely don’t need life insurance (but should still be focused on saving!) and can skip to the next section.
Death isn’t fun to think about, but often, we don’t consider what would happen if the unexpected occurred. We assume we’ll be around forever. But we must consider:
- How will my family cover the rent or mortgage without my income?
- How will my spouse afford college for the children?
- Would my spouse be able to cover all day-to-day expenses without my paycheck coming in?
The decision to buy life insurance is a personal decision and not always an easy one to make. In my experience, most people wrestle with the idea for a while before they decide to purchase life insurance. This decision becomes even more important if you have no money in savings. On average, I suggest that most people purchase ten times their income in life insurance, but again, that’s an individual decision.
Now, if you’re worried that this will be another expense to your already paycheck-to-paycheck lifestyle, don’t be. Life insurance is far more affordable than you think. And remember, we just revisited your expenses and budgeting above.
A 20-year, $500,000 Haven Term life insurance policy can cost a healthy 25-year-old woman about $25 a month.*
Protect Your Paycheck
If I asked you, “What is your most valuable asset,” what would you tell me? Your house? Your car? An expensive painting you’ve inherited? Those things are all useful, yes, and probably have significant value, however, your ability to earn a paycheck is your most valuable asset.
Disability Income Insurance probably falls below life insurance on the list of things you want to talk about and spend money on. However, you should consider moving disability income insurance, A.K.A. the way you protect your ability to earn a paycheck, up to the top of the list of most important expenses to budget for. The fact is, according to the Social Security Administration’s 2015 Fact Sheet, just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67.
If you suffer a long-term disability, your emergency fund can be of some assistance. However, even if you achieve that 3-6 months’ worth of savings, it simply may not be enough money to carry you through your disability.
It’s common for your employer to offer some kind of sponsored long-term disability insurance that covers about 60% of your income until you’re 65. However, if you don’t have a significant emergency fund, or other substantial assets, and if you’re barely making ends meet at 100% of your salary, I’d recommend considering an individual long-term disability policy to supplement your individual coverage.
The Super Powers of Negotiation
Negotiation is one of the most powerful techniques that you can learn to not only save money but also to build money. It especially comes in handy when you want to reduce your out of pocket costs every month and potentially earn more money.
Did you know that you can potentially negotiate for all sorts of things like:
- A lower cable bill
- A lower cell phone bill & better plan
- A lower rental deposit when you rent a house or apartment
- A lower monthly rental amount for your house or apartment
- A lower interest rate on your credit cards
- A lower nightly rate for a hotel stay
- All sorts of perks at work that don’t involve your salary, including an office, flex work hours, a gas allowance, a wardrobe allowance, educational expense and more
That’s just the start of what you can consider negotiating.
One couple that I was working with was having trouble saving money. I challenged them to call their cable company, cell phone company and their credit card companies to negotiate lower payments. After some coaxing, they decided to give it a try and were amazed that just by negotiating they were able to save more than $200 each month. Yes, that’s not like winning the lottery, but that’s an extra $2,400 a year just by making a phone call and being proactive.
When you negotiate, it’s important that you have your research, and that you are polite. Let’s take credit card interest rates as an example. If you’ve recently received any credit card offers in the mail or online, you can use those as leverage for that your interest rate should be. You call your current credit card company and tell them that you just recently got this great offer, and you’re thinking about canceling the card you have with them and switching to the new offer. However, if they’re willing to lower your interest rate you’d rather stay with your current company. On average, I’ve seen credit card companies lower interest rates by 2-5 percent if you have a good credit score and a good payment history with that company.
Leave the Shame Behind
Discussing finances is not something many of us want to do. It’s not fun to talk about our dwindling bank account balance or the amount of debt that we are carrying and can never seem to pay off. It’s a subject that carries so much shame, regret and disappointment, but it doesn’t have to be this way.
Everyone always thinks they are alone when it comes to having little savings or making a poor financial decision at some point in their lives. The fact is, you aren’t alone and you don’t need to feel any shame about your financial situations – as long as you are taking proactive strides to improve it. Yes, saving money takes work, effort, some good ole’ sweat and sacrifices. However, no matter what your income is, saving for emergencies, and better yet the future, is necessary for financial stability for you and your loved ones.
*Coverage is subject to underwriting approval.
Shannah is a CERTIFIED FINANCIAL PLANNER™ professional and is a millennial money financial strategist. She runs the blog Your Millennial Money, and is host of the Millennial Money iTunes podcast. Her husband Jeff is a travel journalist, but when they aren’t traveling she loves to challenge herself in the kitchen by creating a culinary masterpiece worthy of Food Network fame (she can make a mean risotto).