So the other day, a girlfriend and I were talking. She told me that she finds it hard to save, because of expenses popping up that she didn’t plan for. I told her, “shoot girl, you aren’t by yaself. I used to be the same way.” We laughed it off but continued to talk about it. She said that unanticipated expenses crop up regularly — most months or almost every month.
My question to her was, “If unplanned expenses occur so often, can they really be a surprise? I mean, don’t you sort of know that thing’s can and will happen? A Murphy’s law type thing of sorts.”
Her reply, “It isn’t that they’re purely unexpected. If you have a car, you know it’ll break down eventually. The thing is that you don’t really expect it to happen today.”
My next question to her was, “So you know you have a raggedy car, you know it may break down, but you don’t plan for it to break down?” I was so confused by then, I needed a drink and a Goody powder.
I understand with little wiggle room between income and expenses, even relatively small changes in planned spending — like a higher-than-usual heating bill or a minor car repair — can pose a financial challenge, since the timing and exact amount are unpredictable. Trust me, I’ve been there.
I know she saves because I have put her on a savings plan of sorts. Her problem is that she is only saving for shorter-term needs. Money set aside in a savings account may be for next month’s rent, rather than for unspecified needs far in the future. Short-term savings are different from long-term savings. She and I have had the conversation that she needs to build her capability fund. You know, the fund you have for when your car breaks down or some other unexpected event occurs. You have to be capable of handling those expenses. What can I say, my friend is hard headed, but I love her.
While “saving” has traditionally been thought of as a gradual process of building funds for future use, a different mind-set is at work for families focused on shorter-term needs. Savings is an activity, an ongoing behavior, in which families build up a bit of money, then deplete it when the need arises and build it back up again.
Such behavior can be beneficial, since using the funds as intended, for unexpected expenses, means you do not need to take on high-interest debt.
Here are some questions and answers about financial capability, that can help you prepare for those unexpected expenses:
Ask your bank or credit union to automatically transfer money each month from your checking account to a savings account, (or set up a transfer yourself, if you bank online).
If you don’t have a checking account, start saving your loose change. Once you see a bit of money accrue, it encourages more saving.
Cut back on spending, if you can. If you spend $40 going out to lunch each week, begin taking your lunch to work. It has been found that nearly two-thirds of Americans lack savings to cover a $500 car repair. If they had to reduce spending to pay a bill, more than half said they would eat fewer meals at restaurants.
■ How much should I aim to save?
Older rules of thumb, like saving three months or six months of income, may be unrealistic for many people in the beginning. There’s some danger in setting the bar too high. A more reasonable initial goal, given ups and downs in household finances, is one month of income, to help provide a cushion for the inevitable bumps in the road.
■ What other steps can I take to save?
For starters, you can download my FREE report, 54 Way’s To Save Money. One trick: Every time you indulge — whether it’s to buy a specialty coffee or a six-pack of beer — stash an amount equal to the purchase price in a cookie jar at home. If you can’t afford to save the matching amount, you can’t afford the super almond low-fat latte.
While borrowing money to save money may seem counterintuitive, some credit unions are offering loans that do just that, partly as an alternative to high-fee payday loans. Ask your local credit union if it offers a “borrow and save” program, which lets consumers borrow small amounts — often less than $1,000, although some loans may be as high as $3,000. Typically, as a requirement of the loan, borrowers agree to have a portion of the funds — as much as a quarter or half of the money — deposited into a savings account. When the loan is paid off, the borrower has access to the savings, which can help cover unexpected expenses in the future.
I hope these tips help you and my friend get those financial capability funds in order. What other tip’s can you give to help Overcome Expenses That Thwart Efforts to Save?