Waiting until you receive “more money” before allocating some to a savings account is a trap. If you can only allocate $10.00 at the end of each month, do place it somewhere safe and out of sight. The amount you do save will accumulate quickly, and you will be very happy that you started early vs. waiting until the “perfect time”.
Many people have the perception that you need to earn a high income or have a well-organized excel spreadsheet to create an emergency fund. This is not the case, as an emergency fund serves as the financial shock absorber in unexpected life events. Job loss, business creation, and accidents will all occur without notice, and when they occur, you will be much more pleased with yourself to see an amount in your bank account instead of seeing the message, “good luck”.
An example of this is David Wolfenden, the founder and CEO of Eden. At the age of 16 David received a wake-up call when his father was accidentally kicked in the head by a horse. Without warning, the primary source of income for David’s family was gone. They had no warning and were not prepared for such an event, and one day was just another day and the next day was completely different.
I wasn’t really thinking about saving before; the way most teens handle their money is to spend whatever income they have as fast as they get it. There are jobs to be had, there’s money coming in, but there is no rainy day fund (six months of expenses) in the background. When income suddenly stops due to circumstances out of one’s control, it becomes apparent that being financially secure is extremely important.
In David’s case, shifting one’s zero line, or how to define where one’s financial security actually begins and ends, has a tremendous impact on behavior towards money. Most people assume that zero means they are broke, but wouldn’t it be better for a person to have a zero line that indicates they only have enough savings to last them for six months?
As soon as a person’s emergency fund drops below that zero line (having less than six months of savings), that person will certainly experience something and will most likely take action.
As David walked home from work early in 2020, he realized that people spend many billions of dollars every year on virtual items, such as skins for video games, or virtual enhancements to their characters in games, which don’t even exist in a real-world environment. At the same time, many people in David’s generation have significant difficulty with basic saving behaviors.
Instead of using funds to buy a virtual item, David wants people to be able to grow their savings and maintain a visual representation of that growth. For example, developing a virtual island that expands as savings increase will provide a psychological benefit to a person, while providing an attractive reason to save and when a person views their bank account balance.
David keeps it really simple. Take a look at how you actually live and what your life looks like right now — not the “super-frugal” rice and beans version of your life. Then take a look at your last several months’ worth of bank statements and calculate what you actually spent when you were living comfortably (an average).
Then multiply that number by 6.
That is the true number.
That is NOT the “barely surviving” number, but rather the REAL number that reflects how you live your life.
Some people want to have 10 or 12 months worth of money. That is great if you can do it, but six months is a fine place to start. It provides “breathing room”, and gives you the time to deal with life when it happens, which gives you power.
Now, where do I keep this money?
There are many different options. Some people prefer to set up a separate account in a bank account. Out of sight, out of mind.
If you would prefer to earn a little return on your money, you can invest it in a very low-risk, well diversified dividend portfolio. The key word is “low-risk”. This is not a “let’s gamble for high growth” investment. This is a “life just got too real” money.
Make it easy to get to. Make it an Easy Place to Access.
One of the most overlooked pieces of a Healthy Financial Plan are the different forms of assets that you may hold.
You can hedge your risk with an Emergency Fund. You can grow and develop your Wealth with a variety of Investment Assets.
For an individual just starting their Wealth-Building Journey, those Investment Assets could be primarily focused around investments in stocks through a Diversified Stock Portfolio. However, for someone who has built their Wealth to a level where they have money to invest in additional types of assets such as Real Estate, I would then suggest purchasing Rental Properties. This is because a Rental Property can generate a stream of passive income for you. Thus, you now have a source of Cash Flow that does not require you to Exchange Hours for Dollars.
Therefore, the ultimate goal with Assets is to remove your reliance on your paycheck In an Ever-Changing World. Relying on just one source of income is very Dangerous. This was evident throughout the COVID-19 Pandemic for millions of people when they were laid off of work, had their employment ended permanently, or had to completely change their schedule due to the forced closure of businesses. You could see the difference in the Stability versus Panic during the pandemic by looking at one’s savings.
What advice would you give yourself if you could time travel to your past?
To make a funny comment, David would say he would buy fewer boards for surfing, but he does have a serious point to make in that respect: buy things that increase in value, and always protect your investment by putting your money in safe places before you spend it on things like vacations and other luxuries.
When you receive your paycheck each week you should set aside your emergency fund first; then use the remaining money to increase your investment by purchasing an asset or making a lifestyle change.
Before you think about how to save money by using only small amounts each week from your paycheck, go back to the first part of this post.
If you save ten dollars a week, that will make all the difference in the world!
Being consistent is much better than being overly enthusiastic about saving.
Take a little money every month and save it in a separate account where you will not have access. After a while, when you need to use that saved money, you will be able to see how much it has accumulated and will be able to pay bills or get out of debt easily because you saved it and did not spend it.
You will be so happy you did not pay that extra fifty dollars for that new pair of shoes or the latest digital game.
How does your emergency fund compare right now?
