 Financial Basics in Difficult Economic Times
By Jan Knight
~~~~~~~~~~~~~~~~~
Difficult economic times are an equalizer. It doesn’t matter how little or how much you have, the prospect – or today, the reality of loss is troubling. The current economic situation is also an opportunity. I’m not talking about capitalizing on the stock market being “on sale.” I’m not talking about something more fundamental and necessary if we are to emerge from the challenges of today being better positioned for a financial future. I’m talking about getting back to the “basics”.
Fundamental principles are something we become familiar with as we progress through school. There are core concepts, for example of reading and math. The alphabet and addition and subtraction are building blocks which, if we are successful, will lead to literature and algebra.
In a similar way there are some fundamental principles that are basic and critical components to building your financial future. If put into place, these fundamental concepts can provide a structure to build financially. One fundamental element of your financial foundation should be an adequate emergency or “rainy day” fund.
The idea of an emergency fund is one you probably heard before. It’s not new or novel or flashy. But having an emergency savings fund allows us to have financial options. And we all like to have options. The rule of thumb is to have a fund equal to six months of your household income available in savings. By savings we mean your checking account, savings account, money market fund, etc. The main criterion is that these funds need to be accessible and liquid. By liquid we mean that, basically, it’s cash.
You shouldn’t have to sell something to have cash and you shouldn’t be penalized if you take your cash. Leading up to the fall of last year, it was pretty common for people to tell me that their home equity line of credit (HELOC) was their emergency fund. I would tell them that it wasn’t the same thing, but their response was that they could draw down their HELOC whenever they needed to. Now we’ve had a reality check. Banks have reduced (or eliminated altogether) those lines of credit. Real Estate is not, and never should be counted on to be liquid.
So it’s back to the basics. For many this means beginning to save. Saving money is a neglected habit that is back in fashion today. Recent published figures indicate that the personal savings rate has increased nationally to 5%. This is very encouraging when you consider that in January of 2008, the savings rate was .1%. As we work to create some of these new habits to pursue the fundamentals, remember one key principle: we’re looking for progress, not perfection. If you haven’t had an emergency fund, it can take some time to build to six months of your household income. The important thing is to get started. Make a goal, start the habit, and being to work on building your savings.
You’ve probably heard the adage “pay yourself first”. This is a great habit to acquire. Working up to a goal of saving 10 -15% of each paycheck will help you reach your savings goal.
So what about the “options” I mentioned? Having an adequate savings account allows us to respond to financial emergencies (like having your car repaired or fixing a roof leak). But it also allows us to take advantage of opportunities that come our way. Opportunities that we would otherwise miss- or worse, put on a credit card.
One final note regarding your savings progress. Some people believe that you shouldn’t start saving until you have eliminated your credit card debt. I believe it’s important to do both. Until you have adequate savings, any unplanned expense (like those repairs), will wreak havoc on your finances (and your psyche). In that event, you’ll probably end up using credit to cover your emergency, which puts you back at square one.
It’s important to pay off those credit cards but not to the exclusion of building your savings. Identify an attainable amount to begin putting away from each paycheck. Divide that figure into halves- half to go to paying down your credit card debt and half to your savings plan. Tax refunds, pay raises and other financial serendipities should be allocated the same way until you get to your six month goal.
If you have a significant amount of debt, a savings rate of 10%-15% may not be enough – and you may need to make more drastic changes in your budget to allow you to make progress in paying down that debt.
Saving money doesn’t have to feel punitive. In fact, it can be empowering. Seeing your balance grow along with the feelings of confidence and security is very affirming. Committing to a habit of savings doesn’t mean having to say “no” all the time. Instead, saying “not now” sometimes gives us the opportunity to say “yes” to something better in the future. We’ll be discussing a few more financial fundamentals in the months to come, so keep visiting WomensEducationCenter.com.
Jan Knight runs Women Wealth Strategies in Fort Lauderdale, Florida. She works with busy professionals and business owners who realize that “hope” is not an effective strategy for creating a secure financial future. As a fifteen year veteran of the financial services industry, Jan is a requested speaker and seminar presenter. Her past engagements include the Office Depot Success Strategies Conference, Danskin Women’s Triathlon, Women Helping Women Conference, Balance Work-Life Institute’s Power Networking luncheon, and the 2008 Women’s Congress in Miami http://www.janknight.net janknight@finsvcs.com
For additional information about adding an article or event,
please fill out our Contact Form. |
