In this series I am covering the 24 tell-tale signs that you could be in financial trouble. Over the next few weeks I will be presenting these signs, how to identify them and tips on how to address the issue.
It probably doesn’t come as much of a surprise that not having adequate or any savings at all is a sign of financial trouble. The reason this is the first sign on the list is that bad things happen to good people, and more often than not these are unexpected events. Without a safety net of some sort of savings or emergency fund you are setting yourself up for getting into even further financial trouble.
Things happen all the time and it is part of life. Whether it is a loss of income, a natural disaster, accident, unexpected sickness or even an unexpected child there are many possibilities out there that could impact you. We hear stories in the media all the time about people suffering from one thing or another and it is easy to conclude that it won’t happen to you. This is a big mistake.
Clearly if you have absolutely no savings at all it is a sure sign that you could face significant financial troubles in the event of something unexpected. But what if you currently do have some savings, is it enough? There are many different schools of thought on this; some say three months of expenses while others say six. Clearly the more savings you have the better but this is not an easy thing to achieve and generally doesn’t happen right away.
Perhaps the most difficult aspect of saving money is actually taking that first step. If you don’t have any or much savings it is probably because money is tight, so the thought of putting money aside when there are other bills to pay may be quite stressful. If you don’t have one already you need to open a savings account. This could be through your local bank or credit union or through one of the online savings options such as ING Direct. The most important feature of this account should be that it allows you to make systematic and automatic contributions.
Next, you need to determine the frequency and amount of money to save. If it isn’t an automatic process you will probably end up unable to keep your commitment to save. For starters you should determine how frequently you want money to be deposited into your savings account. The more frequent the deposit the less you will feel it. If you are paid weekly, great. Either set your direct deposit with your employer to deposit part of your paycheck into the savings each week. If you don’t have direct deposit or don’t want to hassle changing it you can do the same thing with automatic transfers from your checking account. Each payday simply schedule an automatic transfer into your savings. If you are paid bi-weekly you can follow the same steps. Coordinating deposits with pay will lessen the impact of that money leaving your account.
One of the difficult things to consider when establishing a savings plan is determining how much to save. When you look at the dollar amount required to cover a few months worth of expenses can be very discouraging. The key is to try not to look at the ultimate dollar amount and instead look at it on a monthly basis. Generating savings will take time so if you can look at it on shorter terms it will seem like an obtainable goal.
When things are tight it is hard to let go of any money. If this is the case you just need to start small. In an example let’s say you are paid bi-weekly. Would $10 coming out of your paycheck really be noticed? Probably not. This comes to only $20 per month, which you are probably saying is almost nothing. That is true, it isn’t much money and at that rate it would take years to save up enough money to fund your savings. That isn’t the point. The point here is to establish something, even if it is small. This establishes a good habit which is what you need in order to be successful in creating savings.
Once you have established a regular and automatic deposit into your savings you will generally not even notice that money coming out after a few deposits. You begin to forget and just adjust your spending to work within the new net income. This is the point in which you need to make changes. If you get used to $10 or $20 coming out per paycheck, bump it up after a month or two by another $10 or $20. Let that new amount come out for a few paychecks or months and then add a few more dollars to this amount. This gradual process will reduce the shock and allow you to slowly build up your savings.
Remember, this doesn’t happen overnight and don’t expect it to. Most people get discouraged simply because it seems impossible to save a sizable amount of money in a short amount of time. So start slowly and with modest amounts, then adjust those amounts in small increments over time. Before you know it you will be saving enough money to adaquately build your savings in a reasonable amount of time. The real key is to get into the habit of saving money regularly. Time will take care of the rest.
24 Signs That You Could be in Financial Trouble
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Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Bernard, a savings account is fine as long as it is earning competitive interest. I don't know what it is earning now so I can't say whether or not it is the best idea for you or not.
The key to an emergency fund is that you need to have it available very quickly in the event of an emergency. You could earn more money with CDs or some other savings vehicles but then you are faced with some withdrawal limitations.
Generally a savings account at your bank provides the most liquidity, but you may sacrifice a little in interest. The next bet could be with an online savings account (ie. ING, Emigrant Direct, etc). They will provide better interest and will provide access to the money in a reasonable amount of time.
So as long as it is earning reasonable interest and you can access the money fairly quickly you should be in good shape.
I have someone who advised me to put aside 6 month worth of my monthly salary as my emergency fund. I had that put aside in a saving accounts. Thinking back, I should look for a better place to place this fund which offer a higher rate than the saving accounts. Perhaps a fixed deposit?
You're right Rebel, when you need it you're glad it's there. We had an issue earlier this year as well. Granted, we did not have much of an emergency savings fund, but we had some unexpected car trouble that resulted in repairs of about $1,200.
This was very unexpected but we did have enough set aside to cover it without throwing it onto a credit card or depleting our checking to a point where we wouldn't have been able to pay more important bills (i.e. mortgage).
We are in the process of building it back up again since then. It can be a slow process but it begins to add up.
This is a great idea. This is how I have started. I have my account taking out $25 a month. I haven't had anyproblems so I gonna extend that to $50 next month. I am just getting started and it is amazing how we over look how important an emergency fund is. I was laid off last year and have experienced that.
For people in such extreme situations it comes down to finding other ways to make up the difference. If increasing income isn't an option (whether through existing employment or side work) then find other ways to shave a few dollars off your budget each week.
Saving just $5 per week would get you to that $20/month target to start. I can't get into all of the details as to how to accomplish this because everyone's situation is different, but skipping that lunch out one day a week, buying some bulk food to extend meals, etc are just some little items that can help.
I know it is difficult because I've been there before. Working a limited number of hours in college, racked up a bunch of credit card debt to pay for bills and expenses, etc. In these situations it comes down to finding other ways to save a few pennies here and there or find ways to make a few extra bucks on the side that will allow you to put something, anything into savings.
Just keep in mind that sometimes you do NOT have the money to put even $10 from each paycheck into savings. I am a foreign student who is restricted to working 20 hrs a week maximum on campus for minimum wage. I make between $350-$400 a month depending on whether I get sent home because we are slow. Rent is $300. That leaves $50-$100 to pay for food, the credit cards that put me through school earlier, electricity, and other monthly bills. It is not a choice..but a fact of life for me at this point.
There are some people who just do not have the money to save. What do they do then?