Developing A Personal Savings Plan
- By Real Financial Goals
- Published 04/13/2007
- Budgeting
- Unrated
One of the most important aspects of personal financial management is building an emergency “nest egg”. This is the amount of money you have set aside to handle emergencies like a sudden need for a new hot water heater, job loss, or to fund that down payment on your new house. In order to build a sufficient amount of money in your emergency fund you will need a plan.
A general rule of thumb for how large an emergency fund should be is three to six months of living expenses. Of course, the real size of this depends on your actual living expenses, which, for some people, can amount to nearly 100% of their salary. Fortunately, this is not the case for most people. The key is to be realistic about what you define as a “living expense.”
Obvious items to include in your living expense list are things like rent/mortgage payment, utility payments, food, clothing, out of pocket medical, insurance premiums, property taxes, child care/education, and other miscellaneous but indispensable expenses. Things that should not be included in such a list include lattes at Starbucks, going to the movies every weekend, and exorbitant cell phone bills (unless you’re in sales, then it should be expensed to your business account). It is critical that you think long and hard about what is absolutely necessary in your life before you include it on this list. For instance, is it really necessary that you have access to all 349 channels on the local cable system?
Once you have the list of items and expenses that you have deemed to be absolutely indispensable, it is time to calculate that final number and form a plan. As I mentioned above, three to six months of expenses is a good rule of thumb number to use when deciding how much you need in your emergency fund. Once you have that number, reevaluate one last time to make sure that there are no unnecessary expenses in there. It’s likely to be a large number, maybe even scary. Nevertheless, this is how much you will have to put away to begin putting yourself on the path to financial freedom.
Now it’s time to decide exactly how you are going to put that money away. It may be that you are spending nearly all of your income currently, with nary a penny left to put away in savings after the bills are paid. Now is the time to reevaluate the way you are living, and cut expenses at least temporarily. A good way of identifying areas to cut back is to look at the list you just created. After all, anything that is not on that list is a good candidate for elimination now and not just in the event that an emergency arises.
Now, if you’ve done the job right, you should have some amount of money left at the end of the pay period to put into your savings account. The last step is – Just Do It. If you can setup an automatic direct deposit to your savings account every pay period by working with your employer’s HR department. If this is not possible most banks can easily setup an automatic transfer of funds every month from your checking account to a savings account. If your bank cannot assist you then this will be an excellent exercise in strengthening your willpower. No matter what, do not forget to put that money away. Believe me, when that emergency arises, you will be glad that you did!
A general rule of thumb for how large an emergency fund should be is three to six months of living expenses. Of course, the real size of this depends on your actual living expenses, which, for some people, can amount to nearly 100% of their salary. Fortunately, this is not the case for most people. The key is to be realistic about what you define as a “living expense.”
Obvious items to include in your living expense list are things like rent/mortgage payment, utility payments, food, clothing, out of pocket medical, insurance premiums, property taxes, child care/education, and other miscellaneous but indispensable expenses. Things that should not be included in such a list include lattes at Starbucks, going to the movies every weekend, and exorbitant cell phone bills (unless you’re in sales, then it should be expensed to your business account). It is critical that you think long and hard about what is absolutely necessary in your life before you include it on this list. For instance, is it really necessary that you have access to all 349 channels on the local cable system?
Once you have the list of items and expenses that you have deemed to be absolutely indispensable, it is time to calculate that final number and form a plan. As I mentioned above, three to six months of expenses is a good rule of thumb number to use when deciding how much you need in your emergency fund. Once you have that number, reevaluate one last time to make sure that there are no unnecessary expenses in there. It’s likely to be a large number, maybe even scary. Nevertheless, this is how much you will have to put away to begin putting yourself on the path to financial freedom.
Now it’s time to decide exactly how you are going to put that money away. It may be that you are spending nearly all of your income currently, with nary a penny left to put away in savings after the bills are paid. Now is the time to reevaluate the way you are living, and cut expenses at least temporarily. A good way of identifying areas to cut back is to look at the list you just created. After all, anything that is not on that list is a good candidate for elimination now and not just in the event that an emergency arises.
Now, if you’ve done the job right, you should have some amount of money left at the end of the pay period to put into your savings account. The last step is – Just Do It. If you can setup an automatic direct deposit to your savings account every pay period by working with your employer’s HR department. If this is not possible most banks can easily setup an automatic transfer of funds every month from your checking account to a savings account. If your bank cannot assist you then this will be an excellent exercise in strengthening your willpower. No matter what, do not forget to put that money away. Believe me, when that emergency arises, you will be glad that you did!