As you can see by now, I am big on planning. I plan everything including how much I want to save and you should too.
If you don’t have any money saved, plan to begin to saving while reducing your debts. This should not mean that you end up paying off your debts more slowly.
Financially, that does not seem to make sense. It’s better to pay off credit card debt at 20% interest than to save money that earns 4% or 5% interest. Psychologically, it’s a real boost to get some savings underway. You don’t want to end up back where you started, with no savings, while paying off debt.
In addition, your savings will be helpful in case you lose your job or become ill. 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.
Smarter Saving Strategy
People who systematically put aside a certain amount of money each month over a period of years should remember to increase the amount each year to make up for inflation. $100 a month, which was a fairly significant amount 25 years ago, is not adequate today to build a retirement nest egg. If you assume an inflation rate of 4%, the value of the money you have saved will be cut in half in 18 years. If you accumulate $100,000 it will only be worth $50, 000 after inflation. So make sure you give account for inflation in your savings.
If you have been hanging in there with me for the past 6 days be sure to come back tomorrow when I will give you a bit of investing advice.
As usual, I would like to hear from you, tell me your savings strategy in the comments below.