Although each year tends to bring different personal challenges, New Year’s resolutions tend to be the same, such as losing weight, quitting smoking or saving money. In order to achieve these goals how often are we diligent about writing down and executing a plan? If your 2019 resolution is to build a savings cushion, you need a financial plan that makes sense for your budget. Do you have a three-month emergency fund? Six months? Most Americans don’t, but do have a wealth of good intentions. In 2019 you can turn those good intentions into some practical progress.
Why is it hard to save money?
According to a report published by CNBC, roughly 30% of all Americans are constantly stressed about money. The simple fact is: we spend a lot of time worrying about it. Where is it coming from? Where is it going? Will there be enough? What will I do if I need more of it in a pinch?
What if 2019 could be the year you stay true to your resolution and decrease stress caused by financial uncertainty? First, let's talk about the generic problem of saving a three-month emergency fund. Let's say that you make $2,000 a month in take-home pay (after taxes). Saving $6,000 (3 months income) is no small feat, and saving $12,000 (6 months income) feels downright insurmountable because after paying for necessities (rent/mortgage, utility bills, transportation, food), it doesn’t feel like there’s a lot left. When you start to do the math of how long it will take you to turn that into $6,000 or $12,000 you get discouraged and it becomes a good intention. If this sounds like the problem you face year after year, let's talk about how to fix it.
How much do I need to save?
The first step to making progress on that emergency fund is getting realistic about the amount you should save and customizing that amount based on your own personal finances. You don't really need three or six months of your total paycheck because when times get tough, you will get resourceful and tighten your belt, spending money only where you must. So write down a list of expenses you could live without in tough times; such as dining out, drinks with friends, new outfits, or recreation. There are necessary expenses like rent, bills and food that you can’t cut back on. Add up the necessary expenses because that is the number you want to begin with. As a rule of thumb, necessities are roughly 70% of your monthly paycheck. So in our example of $2,000 monthly take home, $1,400 should go to your necessities. The remaining $600 that you currently spend on non-necessities is where you look to cutback spending and divert to your savings.
The second step is to set a short-term savings goal. Let's say $200 in 3 months. Where is that $200 going to come from? Let's go back to that list of things you'd cut back on in tough times. You don’t have to go cold turkey here and save it all immediately. But pick one or two expenses that you can reduce over the next three months and save that $200. Cutting out a few extras each month can quickly add up.
Finally, find a place to stash your savings where it is out of sight - because out of sight out of mind. A good option is always a simple savings account at a local bank. Set up an automatic transfer for each payday, moving a little money to the secret savings and check in on it three months from now. In short order, you'll have the beginnings of an emergency savings fund, and if you repeat this process every 3 months - by this time next year you'll have a pretty sizeable cushion. Be diligent with your saving as it won't be 3 months' worth or 6 months' worth, but it will be more than a good intention and your stress levels will certainly be lower as a result.
Based on the book, “The Compound Effect”, by Darren Hardy, the strategy of taking small steps towards goals is very effective in saving money and eliminating stress related to finances. The first order of business is creating a realistic yet challenging goal to build your emergency fund followed by short-term goal setting. In the event that you get into a financial pinch, it's a lot easier to cut back on expenses opposed to attempting to maintain a lifestyle that will increase anxiety and stress. While saving for your emergency fund, it is good practice to deposit those funds into a bank account so you won't see the money and be tempted to spend it. Repeat these money saving strategies and you'll achieve your financial goals of creating an emergency fund and reducing stress for the new year.
If you have any questions about eliminating financial stress and other financial inquiries visit your nearest Essex Bank branch or visit www.essexbank.com. Essex Bank is a community bank with locations across Virginia and Maryland. With a smile and handshake from any of our associates, you can feel secure that your experience with us will outshine that of any other bank. For over 90 years, we have been invested in providing premier services to personal and commercial consumers while creating experiences of the highest standard. The finest, most helpful associates; simple, easy to understand products; powerful technology in the palm of your hand; and extended hours of person-to-person customer assistance: this is what makes Essex Bank—Simply Better!