Have you ever had to go into debt or eat into your savings because of an emergency expense coming up that couldn’t wait? Maybe your washing machine broke down and you needed to replace it? Or your car had to get a repair that you hadn’t counted on? Did you ever have a plumbing issues that really had to be fixed as soon as possible?
In most of these cases you often can’t NOT pay for the expense as that would only create more problems, damage or costs. But if you don’t have any money set aside that you can call upon for when these types of unexpected expenses come up, it can be almost impossible to find the money to deal with the problem in the moment without either taking on more debt or using money from your savings that was potentially already earmarked for something else.
The fifth challenge of our 31 Challenges this month is to therefore start putting together an emergency fund. In that way you will always have some money set aside to deal with emergencies such as described above. Aiming for roughly $1,000 is usually a good guideline, but of course adjust this as needed. Continue reading →
This step is a hugely important advance in getting control over your finances with the ultimate goal of moving away from living paycheck to paycheck and instead working towards a situation in which you live on last month’s income. Being one month ahead of your finances takes away a lot of stress and worries and gives a small extra financial cushion in your account. I’ll discuss the advantages and disadvantages of this practice first before looking at how you can implement this.
Being one month ahead essentially means that you are using last month’s income for your current month’s expenses. It means that you are ahead of your finances by having an extra month’s pay in your bank account. The money that you are earning this month won’t be used until next month.
The advantages of getting one month ahead
The biggest advantages of being one month ahead include:
It doesn’t matter if you get paid 2 or 3 days late, or if a bill comes in earlier than expected.
You don’t have to worry about going out next week instead of this week if you haven’t yet been paid.
If a bill is larger than expected or budgetted, you don’t have to worry about not having the money and it gives you time to readjust your budget next month.
Lastly, if you have a variable income, you can see a lower income month coming with some warning in order to make any necessary adjustments in your spending .
Once you have built your emergency fund of $1000 (or the equivalent in yourn own currency) for unexpected or emergency expenses, you are going to continue with the new savings goal in line with our mission to reaching financial independence. In this step we look at the ins and outs of a 3 months living fund and you are going to start working towards putting together this fund.
The rationale behind a 3 months living fund is that it would cover your basic living expenses if for whatever reason you no longer receive an income. This might be because you lose your job, are unable to work or voluntarily decide to take time out of work, for example to care for an elderly parent or sick relative or because you want to take time to focus on something else. It a safety net that ties you over for at least three months that will at least cover your basic living expenses for some months, leaving you time to find a new job, an alternative income or just allowing you to take those three months off before returning back to work. Continue reading →
No matter how organized you are and how carefully you have planned and budgeted for the next month, there will always be surprises that come up and hit you financially at unexpected and often inconvenient moments: a car maintenance or fix that you hadn’t planned for, a plumbing issue that needs immediate attention, a sudden vet bill for one of your pets or your washing machine that suddenly breaks down. I am sure you can think of many occasions and examples that could suddenly happen and throw you off-track.
If you don’t expect an expense to come up, often times you won’t have the money available, and you will either be forced to borrow money, eat into your savings or cut out money elsewhere.
In this step you are going to set up and build an emergency fund, in which you have a certain amount of money put away that you can use in case of these unforseen but needed expenses that come up. In that way you don’t need to worry about scraping the money together, you can just pay the bill and get on with your life. A good amount to aim for is generally $1000 or the equivalent in your currency. Whenever you take money out of this account, you aim to get it back up to the $1000 as soon as possible afterwards. Continue reading →