Are You Prepared?
If you were to answer this question honestly you would probably say no. Recent events have shown us how unprepared we really are for a financial emergency.
If your financial weakness has been made clear because of Covid, take action. Once you recover from this financial crisis, take steps to make sure that it never happens again. Remember, those who do not learn from history are doomed to repeat it.
Here is what you need to do.
Save Save Save
Your emergency savings account is the most important thing. If you have enough money saved, obviously you can ride out any storm. It seems obvious enough but most Americans have no emergency savings account and those who do typically have one that is under funded.
You should have at least 6 months worth of expenses in your emergency savings. This means enough money to pay for all of your fixed bills and variable bills such as food, entertainment, etc. So, if you need 4,000 dollars a month to get by, you need 24,000 dollars in your emergency savings.
Seems like a lot but if you take it step by step, it is surely attainable.
Step 1: Open A Savings Account
Easy enough, just open up an account with your current bank right? One click and it is done. Wrong.
You need some separation with your emergency savings. The best route to go is with an online savings account that is separate from your regular checking account. In this way, your money is reachable, but no instantly so.
With an online savings, it takes about 24 to 48 hours to get your money. This means that you can reach it in an emergency but, if you try to make an impulse buy, it gives you time to cool off.
As a side benefit, online savings accounts typically pay more in interest than the big local banks. It is not a huge amount of money, but the difference between. 1.5 percent interest and .1 percent interest is noticeable.
Step 2: Rework Your Budget
The hardest part about saving money is allocating the money for savings. Most of us think that we do not have the money to save, but this is generally not the case.
Just think about all of the little raises you have had over the years. What happened to the money? Like most people, you probably just found another way to spend it. It is called “lifestyle creep” and it happens to the best of us.
Sit down, take a hard look at your budget and make some difficult decisions. You need to be saving at least 10 percent of your take home pay, so keep working until you get there. If you take home 5000 dollars a month, you need to be saving 500 dollars. Sounds like a lot, but it is manageable and necessary.
Finding your money for saving might mean cutting out cable, downgrading to a slower internet speed or even trading in your car for a cheaper model. Whatever it takes to get your saving level where it needs to be.
Step 3: Automate Your Savings
Once you have the money in your budget, automate the savings. There are a lot of ways to do this these days.
If you receive your check via direct deposit, have a part of your paycheck deposited directly into your savings account. Should that not be an option, create an automatic transfer from your checking to your savings.
Your goals are to make saving money effortless and to get the money out of your account before you ever see it.
Pay Off That Debt
When you are faced with a financial emergency or a loss of income, you suddenly realize just how much debt that you really have. Your mortgage, student loan debt and auto loans add up to a significant amount of money, but these are generally not considered harmful debt. This is stuff that everyone has and if your credit is good, the interest that you are paying is minimal.
The real bad debt is credit card debt. Even with good credit, you are probably paying close to or above the national average which is almost 15 percent.
Make it a point to pay off that debt using an organized method. The two most common are the Debt Snowball Method and the Debt Avalanche method. The method you choose will depend on your personality.
1: Debt Snowball Method
If you are the kind of person that likes quick results, most credit card users are, this is the method for you. The idea is to organize all of your cards and then order them by the amount of money owed.
Pay the minimum payment on all of your cards, except the one with the lowest balance. On that card, you will pay as much as you can until it is paid off.
The Debt Snowball Method allows you to see results quicker because that low balance card will get paid off fast. That allows you to see results and motivates you to continue.
2: Debt Avalanche Method
If you are a logical person that is disciplined, this is probably the method for you. It will allow you to get your cards paid off much faster, but it is often less rewarding in the short term.
The theory with this method is to organize your cards by interest rate. Pay the minimum on all of your cards except the one with the highest interest. On this one, you will pay as much as you can.
Since you are paying down the highest interest card first, this method allows you to ultimately pay less in interest and maximizes your dollar. It is not always as immediately gratifying though because the highest interest card could wind up being one with a higher balance. Thus, it takes you longer to get a paid off card.
Diversify Your Income
What would happen if you were laid off from your job right now? For most people, it would be a total loss of income, which could be devastating.
So, how do you diversify your income? If you have a full time job, you might think that you have few options but this is usually not the case.
What you need is a small gig that you could ramp up if needed. This could be driving for Uber, selling services on Fiverr or walking dogs with Rover.
You can use the side gig in the short term to help fund your emergency savings or to pay off that credit card debt. Even just a few hundred dollars in income can make a huge impact on your immediate money situation.
In the long term, if the worst were to happen and you lose your full time job, you could immediately ramp up your side gig to help replace much of that lost income.
Everyone should have some side source of income so that you are not completely dependent on your full time job. As you are probably well aware, the days of job stability are over. With lay offs and frequent restructuring, nobody works for the same company for 30 years anymore.