Saturday, March 4: Save for Unexpected Events
- A financial capability fund consists of a small amount of money, usually in a savings account, that you do not have easy access to. Saving for this fund starts with small, regularly scheduled contributions that build up over time.
I don’t particularly like to call them emergencies. Things happen, it’s as simple as that. Most personal finance experts call them emergency funds, but I call them capability funds. You must be capable of handling anything that comes your financial way. Hence, the financial capability fund.
First, let’s define a financial capability fund. A financial capability fund is cash that you’ve saved for the sole purpose of helping you maintain your normal life through curve balls that life throws at you. Most of the time, you shouldn’t touch the money in this fund. It is supposed to sit there earning a bit of interest and waiting until you actually need it. Times like when you lose your job, an appliance breaks down or your car needs a repair.
Quite often, people who don’t have a capability fund see the idea of having to save up money as some form of punishment. After all, money put in a savings account and locked away is money that can’t be used to live, right?
Actually, it’s quite the opposite. Having a capability fund means that you do have room to breathe. You don’t have to completely panic if your car breaks down or if you lose your job or if you suddenly need to replace a hot water heater. Instead of having to find some way to squeeze those expenses onto a credit card or beg a friend for some money to help, you can just pay the bill – no worries.
Another problem that I often hear about when it comes to capability funds is the temptation that people have to spend the money on things that aren’t considered unplanned events. They see that they’ve built up several hundred dollars in savings and they start thinking about buying a flat screen television or going on a trip – and that’s just what they do.
If you want to have a savings account for big splurges, that’s great – start a “splurge fund,” too, if it makes sense for you. It’s important, though, to just leave the capability fund completely alone until you need it. Deposit money in there and don’t even look at the balance until a real unplanned event occurs.
First Steps with Capability Funds
Set Your Initial Target Low
So, what’s the first step? Many people bite off a gigantic goal for their capability fund right off the bat and then find that it’s very hard to get there. Twelve months of living expenses is an enormous goal, one that will take some time to reach – and along the way, you’re bound to get disheartened.
Instead, one great way to start is to set a goal that’s more reasonable. Make it your initial goal to have a capability fund of just $250 or $500. That’s a goal that you can reach in just a few months (or even less if you’re in a good income situation) and yet it’s an amount that can make a huge difference when you have an emergency.
Then, break that goal down into smaller pieces. Perhaps you can save $25 a week. If that’s the case, you can have a $250 emergency fund in just ten weeks, so you can set that as your overall goal. Maybe you can put away $40 a week, which would bring you to the $500 goal in three months.
My advice is don’t set your savings plan too high at first, either in terms of the amount you can save each week or the overall amount. It should challenge you just a bit, but not be a number that’s simply unreachable.
Find Your Breathing Room
“That’s great,” you’re thinking, “but where am I going to come up with $25 a week? I barely make ends meet now.”
That’s a pretty typical sentiment from people who are just beginning to turn their financial situation around. There are a lot of ways to come up with extra money throughout the month.
Ways to Get Your Capability Fund Started
Request a rate reduction on your credit cards
If you’re carrying a credit card balance, getting your interest rate reduced will directly save you money each month. Just flip over your credit card, call the number on the back, ask to speak to a supervisor, and simply request that the rate be reduced. Suggest that you’re considering transferring your balance off of the card.
Shop around for better auto insurance and homeowners insurance
Try Progressive, Geico, American Family, State Farm, and AIG, for starters. Just visit their websites, get some quotes, and make a switch.
Install a programmable thermostat – and program it
Pretty simple, actually – it just takes thirty minutes or so and will cut your cooling and heating bill by 20 or 30 percent. Set it so that the air conditioner and/or furnace don’t run while you’re sleeping or at work so that the energy isn’t wasted when no one is around or awake to enjoy it.
Use a list for grocery shopping
Ten minutes of planning before you go will save you at least ten minutes in the store, plus it will help you stay focused on the stuff you actually need, This will ultimately reduce your grocery bill because you’re putting less unnecessary stuff in the cart.
Transform one splurge a month
Instead of going out for an expensive dinner once a month, turn that dinner into a meal prepared at home. You’ll save quite a bit even if you prepare something very fancy in your own kitchen.
Set up a carpool
Find someone that lives fairly close to you that works where you do and start carpooling together. Even if you can only do it a few days a week, you’ll still drastically cut down on your commute costs, plus it will be a lot harder to stop for those impulse splurges.
Use public transportation
Even better, get in the habit of using public transportation for your commuting needs. Most metropolitan areas have surprisingly good public transportation options – and they’re far cheaper (and not all that much more time consuming) than driving yourself.
Get on the bike
Want to start getting in better shape? Only live a mile or two from your job? That’s a perfect situation to get a bike and start using it for the commute instead of wasting your dollars on gas and car maintenance.
Trim unnecessary monthly bills
Are you subscribing to Netflix but rarely using it? Cut it! Are you paying for premium cable channels that you never watch? Trim them!
Quite often, when people come into a bit of unexpected money, they tend to spend it without thinking about it. They decide not to stop for coffee, but then choose to spend it later, on take out, for example. Instead of spending that “found money,” take some or all of it and immediately put it into your capability fund. If you have online banking, that’s pretty easy – just transfer it out of your checking account.
The key thing here is to actually save this windfall. Instead of just spending the money on something else, put that money away towards your capability fund. If you find that you’re actually saving more than $50 a week with these tactics, then put more into the capability fund or increase the amount you’re putting into your retirement savings.
Make It Automatic
So, you’ve trimmed $50 a week from your spending, but now you have this cash sitting there and it’s tempting to spend it on something more exciting than a capability fund. You’re tempted…
… but you don’t have to be tempted. Instead, you can set up an automatic savings plan to sweep that money straight out of your checking account and into your savings account that you’re using for a capability fund.
If you haven’t already, I recommend setting up an online savings account at a bank separate than the one you normally do business with for your capability fund. Doing this not only lets you shop around for a bank with good service and good savings account rates, but it also causes you to put the money in a place that’s not quite so easy to access. You can’t just run to the ATM or stop by the teller window and withdraw cash from it – you have to go to your computer, order a transfer, and wait for a day or two to access the cash, which is more than enough time for you to think carefully about what you’re doing and not get sucked in by impulse.
Set Reasonable Milestones Along the Way
In a few months, you’ll hit that first milestone – and it’ll feel good. That account will have enough money in it that it’ll start earning a bit of interest on its own and you’ll start to feel in control of the situation.
Now’s the time to keep going. Set another goal. Maybe a fund of $1,000. Keep that automatic savings plan in place.
Once you reach that goal, aim for a single month’s worth of living expenses. Then two months. Then three. And just keep watching that financial capability fund grow.
Obviously, when you do have an unexpected event tap that fund. Don’t put your car repair bill on the credit card. Don’t start living on plastic while you’re between jobs. Instead, keep living a financially stable life thanks to your planning ahead.
You might just find this is a lot of fun – so you might start seeking out more ways to save. Just keep setting goals for yourself and keep pushing yourself just a little to make it there.
Before you know it, life won’t be disrupted by these kinds of events. You’ll sleep a lot better at night knowing that.
You can find more way’s to overcome unexpected expenses that thwart efforts to save here.
Do you have any tips or tricks you can share to save money and build a finanical capability fund? If so drop them in the comments below, I’d love to hear from you!