Financial shocks are inevitable during a lifetime. “Stuff happens” according to the PG-rated version of that cliche. When it does my language is more NC-17. Nevertheless, happens it does. The most common financial shocks for working-class families are:
What is an emergency fund? It is a "liquidity buffer" between you and ruin. If you have very little saved — say $200 to $500 — each additional dollar you set aside dramatically reduces your likelihood of falling into financial hardship. It can be any of these items. Some are decidedly better options than others:
Forget the 3 to 6 months of take-home pay that is commonly parroted throughout financial media and literature. This goal is often unattainable for low-income wage earners. A more realistic minimum target is $2,467. A fund of this amount will be sufficient for most emergencies. Having such a fund stops you from getting stuck with short term remedies with long term consequences like being late on rent or borrowing from a payday lender. Often creating a cycle of cash draining late fees and prolonged financial insecurity.
Building an emergency fund is your #1 priority. You should well establish an emergency fund before you divert resources to the very prudent debt reduction strategy necessary for your long term success. You should continue or start making all minimum payments on time and continue to do so until your emergency is well funded.
Debt reduction is achieved by consistent application of payment to the principal balance. Having an emergency fund will let you maintain a good payment history so you won’t have to “rob Peter to pay Paul” when the inevitable happens. One missed credit card minimum payment can close off what may be a critical asset during a financial emergency and put a big hole in your safety net. Modified universal default terms may render a late payment to one lender a catastrophe in your creditworthiness regardless of your actual payment history.
Your ability to borrow should be viewed as part of your safety net. It creates capacity and demonstrates financial capability. Your credit card cash advances and spending limits arecritical components that can be managed to help mitigate some of the impacts of an emergency and buying you time. An excellent credit score can give you immediate access to additional money during an emergency. It is a MoneySmartLife strategy to responsibly and proactively expand your borrowing capacity annually. Just as your net worth expands annually so should your credit capacity. They weave your safety net tighter and softer.
Where does the money go? Answer: holes in your spending plan or spending leaks.
A spending leak is an uncontrolled expenditure of resources. Spending leaks are caused by a variety of reasons, both personal and economic. Common examples of spending leaks are susceptibility to impulse purchases, routinely paying credit card interest, or using energy inefficiently. Whether small or large, leaks add up and reduce the chances of achieving your goals. Sometimes spending leaks are hidden or camouflaged. So they have to be discovered. Others are more apparent. Once discovered spending leaks must be fixed.
Fixing a spending leak may be quick or require a long term behavior change. All are repairable with varying degrees of difficulty. Here is one spending leak repair that is sustainable. It is a behavior change that eliminates a leak for a lifetime. Make a quality decision to Stop Paying Fees. A quality decision is one from which there is no retreat. Most people don’t make a lot of those in their lives. Nor should they. But you can on this one. Just set your jaw, head down, and just do it.
Fees are not interest. They are other charges for privileges or penalties you have accessed through your actions. If you don’t access them, you don’t pay. It may take a strategy and some time to sustainably eliminate all fees but it can be done.I have for decades.
Here are 5 fees to never pay again. When it comes to my money I see paying these fees as a self-inflicted wound. Those are the worse kind. I decided to stop hurting myself on purpose.
Most employees unnecessarily leave money on the table when it comes to their compensation by not maximizing their employer-provided benefits. According to the BLS, 30% of your compensation is benefits. Let’s look at some strategies to get the most out of your benefits for the rest of this year.
But first a rant about paid vacation days. I realize that 1 in 4 American workers don’t get any paid time off at all. The rest get paid vacation “yet only 51% of paid vacation days are used! More disturbingly (if not surprisingly), 61% of those who do take vacation are “working while on vacation.” Americans left 768 million days of paid time off unused last year, according to research released by the U.S. Travel Association. The study found that 55 percent of Americans did not use all of their paid vacation time.” Why would you do that? Seriously, ask yourself, “why would I do that?” What are the short/long term benefits of this behavior?
Here is what to do for the rest of this year. The best time to do this is around October 1. This will give you flexibility before that end of the year time crush everyone experiences. Also, it gives time for any changes in your withholding strategies to take effect and return the expected benefits. Of course, these strategies can be implemented anytime.