I’m going to piggyback on my blog posts from February 23 and March 2. The first, was posted during America Saves Week, the second, touched on using your tax refund. How are these two connected? America Saves Week covered various savings needs and tips from families on how to reach those savings goals. You can watch videos covering each topic on my Facebook page, search #ASW2021. My March 2 post dealt with getting a tax refund and how to use it. The two are linked because saving is important. If you are struggling to save, your tax refund is a mini windfall and the perfect opportunity to jumpstart your savings.
Saving and having a cash position is an important aspect of wealth building. From time to time, you may have a need for cash. Cash as an asset is as valuable in your portfolio as any stock, bond, real estate holding, or future income stream such as a pension. Our buy now, pay later society has conditioned us to live right on the edge and to not value cash reserves.
Having money in the bank doesn’t mean you can afford that shiny bauble. Ok, so maybe it’s not a shiny bauble, but you get the idea. For many people, reaching the end of the month and having a little cash leftover feels odd. Many assume that if they have the money in the bank, they can afford an extra monthly payment for something or otherwise spend that money. Having money in the bank is ok. It doesn’t mean you need to spend it. You need to have a 6-to-9-month cash emergency fund. The emergency fund is for emergencies such as a disruption in income, replacing a car, or a possible medical emergency.
There is some good news about saving. During the pandemic, some people have been able to increase their savings. Some, for the first time in their lives. This is attributed to many factors including being able to work from home, not spending on commuting, money saved from eating at home versus restaurants, and stimulus money. Whatever the cause, this has been a good bump in consumer savings.
You may be asking how to get started, how much to save, and in what combination should you have cash in relation to your other investments? The answer as always, is that it depends. It depends on how much, if any, you are already saving, what your goals are, and when you feel you may need the money, and what your risk tolerance is for investing. Let’s start with some basics.
Your emergency fund should be somewhere between 6-to-9-months, or more, of total monthly expenses. If you have an annual expense, such as quake insurance or real estate taxes, be sure to include 1/12 of that amount in your monthly budget calculation. Whether your emergency fund is 6 months, 9 months, or more, depends on your personal situation. Factors such as how much income you have will play a part in your goal. Do you have one income, or are you a two-income household? How you hold your emergency fund may also differ from other people. For some, a cash savings account is sufficient. Others may have a larger emergency fund and hold it in a variety of ways including a cash savings account, short-term CDs, or other cash-based accounts. How you hold your cash needs to be discussed with your financial planner.
You can start small. If you save $20 per week by the end of the month you are at $80. By the end of one year, you have $1,040. That’s a great foundation. Savings accounts currently pay very little interest. However, some interest is better than none. Keep in mind that the interest paid on cash accounts does change over time. For your emergency fund, don’t be too concerned about the rate of interest on the account. That’s not the point.
Look for mini windfalls to beef up your savings. Things like a tax refund, purchase rebate, unexpected bonus, birthday or gift cash, or possibly cash rewards from credit cards are all mini windfalls that can be added to your savings. Selling items you no longer need can raise some quick cash as well. These days, no need for a garage sale. Just create an account and list your items online.
More than one goal can be achieved. I usually get the question, should I save, or pay off my debt? It may not be that simple. With a financial plan in place, you can make progress on both goals – saving and debt payoff. Remember, YOU are the most important component of your financial plan. You are the one earning the money, so remember to pay yourself first! Always!
Monthly budgeting and keeping an eye on cash flow is also a key to saving. We all have needs and wants. Our income has to cover our needs, and we should be budgeting to some degree for our wants. After all, why earn money if we can’t enjoy some of it now. A good method to trim monthly expenses is to use the PERK method. Sit down, list all of your monthly spending and go over each item. Decide if you can Postpone, Eliminate, Reduce, or need to Keep the line item you are spending money on. You can PERK up your savings and finances by staying on top of your needs and wants, and periodically trimming what you spend money on.
With regard to your debt, get a debt analysis and find out what you should be paying first, and how much. Whatever you do, don’t waste your time and money by adding an extra $5 or $10 to each of your monthly debt payments. You need to decide which is more important to you: time, or money saved? You can use either the snowball or avalanche method to pay down your debt while you are also saving. Just be sure to get your debt on a strategic paydown plan. You can read more about paying debt here - Five Keys to Financial Freedom: Key 2.
Don’t be afraid to pay yourself first, and build up your cash. I can’t think of anyone who ever complained about having too much money. As an independent Certified Financial Planner™ I can help you decide how to put your windfall to work, pay your debts, and save. Contact me and let’s get started! #talktometuesday #refund #Hireaplanner #bonus #income #cash #CFPPro #tax #stimulus #COVID #PERK #saving