This blog is a way for me to share hard learned lessons about money with those who are just starting out on their own. I hope it's a way for you to avoid making the mistakes I made, and to benefit from my experiences

Thursday, July 13, 2006

Lesson 3: Save For A Rainy Day

Yes, it's a cliche, but emergencies do happen. The car dies, you get sick and can't work, or you lose your job. What do you do then? If you have no savings, you can rack up credit card debt just to get by, but that just leads to misery and bankruptcy down the road. You can sponge off of family, but that only creates bad feelings among the family.

You must build yourself an emergency savings. Your ultimate goal is to build a minimum of 3 months of living expenses worth of savings. You want enough to pay all your expenses, like rent, food, utilities, etc. for at least 3 full months. Personally, I'd feel better about 6 months, but you need to at least save the minimum 3 months worth of expenses and then figure out what level makes you comfortable after that. If you are truly paranoid and always worrying about the next depression or if your job is always in danger, or even UFOs, you may even want very high levels of savings, like 24 months worth of expenses.

Then after you reached your emergency fund's goal, don't touch that money, unless it's an emergency. A great sale on a new car or big screen TV is not an emergency!

Even more important is how you do this! Do not just save whenever you have some extra money. You must make this a priority. You must pay yourself before you pay anyone else. Look at your income and expenses, then try and set aside a set percentage every month for this saving. 5% of each month's gross pay is reasonable. Then make it automatic. See if your employer will do a direct deposit and automatically siphon off 5% every month into your designated savings account. You may have to estimate the dollar amount for them. If your employer won't do this, then you instruct your savings account to automatically deduct that money after every pay day. Almost all banks can do this online now.

The goal of making it automatic is so that you don't see the money, and you don't wait to do it. It saves automatically. After a few months, you'll completely get used to not having that money.

After you've saved the 3 or 6 months, or whatever you feel is appropriate, worth of expenses, keep saving that money automatically. Save it for a down payment on a house, a car, vacation, whatever. Use this automated savings method for larger purchases, to avoid using debt to buy that car or vacation.

As I write this, several online banks are offering phenomenal interest rates on FDIC insured savings. Also money market funds through brokerages offer good rates and are very secure as well. Some money market accounts are even tax free. Here are links to these online banks and brokerages. Check them out.

Emigrant Direct
HSBC Direct
Amboy Direct
Fidelity
Vanguard
E-Trade Bank

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