I’m in the middle of wedding planning right now, and it has opened my eyes to just how incredibly expensive this whole thing can be!
I’m a frugal person at heart so the idea of spending a ton of money on one day seems a little silly to me. But it’s hard not to get caught up in all of it, and I’m finding that the costs are adding up quickly.
So, how do you have a wedding you love without spending more than you can afford? I’ve been thinking about this as I plan my own wedding. I’m fortunate that my parents have been very generous, and here are a few things I’ve learned along the way.
Yeah, I know. Big surprise that the financial planner is encouraging you to plan ahead. But there are two reasons why it’s helpful to make a plan before making any final decisions.
First, it’s amazing how quickly even the little costs add up. There are so many different pieces to a wedding that you can make a lot of seemingly reasonable choices and still end up with a big total bill. By planning ahead, you can see that happen before you’ve actually committed to anything and make decisions accordingly.
Second, it’s easier to get good deals when you’re on top of things early. Venues get booked, DJs aren’t available, and prices go up. The longer you wait, the less likely it is you’ll get your first choice and the more likely it is you’ll have to pay extra.
The Knot has a fantastic wedding budget calculator that can help you allocate funds across all wedding expense categories.
Your wedding doesn’t have to be like every other wedding. It can not only be cheaper to do things your way, but it can make for a fun and unique experience.
A friend of mine had a fall wedding and served pies instead of a wedding cake. This option was delicious and at least half as expensive; with pie at $2 per slice and wedding cake at $4 or more. Another one enlisted the help of her friends to make their own floral arrangements. I’m making small ornaments for wedding favors, out of paper (not expensive) and supplies I already had on hand.
Music, in particular a live band, is another expense that can be reduced, involve friends who have musical talents or crowd source a playlist from all your guests. There are an infinite number of ways you can get creative, save money, and make the wedding yours in the process.
Consider Your Guests’ Budgets Too
Your friends and family want to come celebrate with you, but for many of them it’s a big financial commitment. Doing what you can to make it easier for them will be much appreciated.
I have a friend who had a camping option, as one of the accommodations for her wedding. Not only was the price right, but it was a memorable experience. Suggesting accommodation options to guests with a range of prices is always appreciated.
For our wedding, we’re trying to make sure that people know how to enjoy themselves during the weekend without having to spend a ton of extra money, so we’re giving them a map of our favorite hiking trails in the area. Little things like that won’t make all the costs go away, but every little bit helps.
Be True to You
In the end, there’s no right way to do a wedding. You don’t have to be as fancy and extravagant as all the wedding magazines. But you don’t have to cut costs to the bone either.
I work with a lot of new couples who are in the midst of merging their financial lives for the very first time. In fact, my fiance and I are in the process of doing it ourselves too.
It’s not an easy thing to figure out. There are logistics to handle, habits to change, emotions to manage, and often it feels like there is never enough time in the day for any of it.
But successfully managing money together is key to creating a happy partnership, so here are four pieces of advice as you go through this process yourself.
1. Focus on Joint Goals, Not Joint Accounts
It’s tempting to get caught up in the logistics of joining your finances. How do you create joint accounts? Which accounts should you join? What if you want to keep some money for yourself? Does that mean your relationship is in trouble?
Ignore all of that. It doesn’t matter. At least not at the start.
What really matters are your joint goals. What are you working towards? What is your shared vision for the life you’re building together?
Start having conversations about what you each value and want out of life. Listen to each other so you can truly understand what’s important to the other person.
Find the goals you already have in common and make those the priorities. And start talking about how you can find middle ground on the others.
This communication is the real key to successfully merging your finances. All the rest is just logistics.
2. Establish Shared Expenses
Now, about those logistics…
One easy place to start is with your everyday expenses. Things like cable, internet, electricity, and groceries.
Decide which expenses you want to share and how you want to split them up. For example, if one person makes significantly more, maybe they’re responsible for a bigger share of certain expenses. That way each of you is left with some free money at the end of it.
3. Create a System
There are two main ways you can start sharing those expenses.
The first is to create a joint bank account where those bills are paid. Then you each are responsible for transferring money to that account on a regular schedule to cover the bills. This lets you practice managing a joint account without having to join everything.
Another option is to put each person in charge of certain bills. For example, one of you could handle the cable bill while the other handles the electricity bill. This kind of system may be easier to get up and running quickly.
Also, create a system for long term savings. I know someone who gave half their paycheck to their partner to invest for the long term. This might not be the right move for you, but start by discussing each of your current habits and how you might change those or improve on them as a couple.
4. Plan for Extra Money
Here’s something my fiance and I have done that’s helped us a lot.
In addition to our regular expenses and savings, we each have a number of “wants” that our extra money could go towards. For example, I’d like to get curtains and my fiance wants gardening supplies.
So we made a list of these things and put them in priority order. And now any time we have some extra money, we simply refer to this list and put it towards the top item.
This makes these decisions easy, limits the opportunity for arguments, and ensures that we’re both able to indulge a little bit.
I’m 30 years old and I’ve never had salary certainty. That is, I’ve never had a definite (or even approximate) sense of how much money I’m going to make in a given year.
From teenage camp counselor to professional actress to full time entrepreneur, inconsistent, unpredictable income has always been a fact of my financial life.
Even as my income has grown, the uncertainty of cash flow remains. (Turns out it doesn’t matter how many thousands of dollars are “on the way”, if none of them are in your bank account when it comes time to pay your quarterly tax bill).
To manage the demands of cash flow management with irregular income, I’ve mastered a variety of techniques to stay solvent in the short-term while also staying accountable to my big picture goals.
Today, I’m going to walk you through 4 ways to budget with inconsistent income. These strategies can be used individually, they can be mixed and matched, or they can be implemented all at once.
The objective is to create a framework that allows you to feel financially secure, even without salary certainty – to address long term financial plans like paying down debt and building savings, while meeting your monthly needs.
1. Live on Last Month’s Income
Instead of trying to guess what you’re going to make this month and budgeting off of that projection, use your actual earnings from last month to set the parameters for your spending this month.
I use my total income at the end of each month as a guide to map out my spending and savings plan for the next 30 days. That way, I stay grounded in the reality of my means, even when I don’t know exactly what my means will look like going forward.
But what happens if you don’t earn enough one-month to cover the cost of your necessities the following month? And what is “enough” anyway?
That brings me to the next way to budget with inconsistent income…
2. Know Your Make or Break Number
How much, at a minimum, does it cost to run your life each month? That’s your make or break number.
To calculate your make or break number you need three totals:
- Your monthly bare bones budget total. That is, the cumulative cost of your monthly necessities – anything you need to live and work normally, including housing, food, insurance, transportation, etc.
Remember to include any irregular (but necessary) expenses in your monthly bare bones budget total. An annual bill for property taxes for example, you would divide by 12. A quarterly insurance payment, divide by 3.
- A bare bones budget buffer. Take your monthly bare bones total and add a budget buffer of at least ten percent. Life is always more expensive than we anticipate (even when we keep it bare bones).
- Monthly financial goal targets. What are you long-term financial goals? Paying off student loan debt? Hitting a retirement savings target? Saving up for a down payment on a home? Taking a vacation next summer?
Get grounded in the numbers needed to achieve your goals, then break each one down into a manageable monthly mini-target. If the total monthly sum of your financial goal targets is more than you can afford, prioritize those that are most important to you, adding the remainder into your plan as you’re able.
Monthly bare bones total + budget buffer + monthly financial goal targets = monthly make or break number
Your make or break number, calculated in this fashion, is a benchmark for the financial viability of your life.
I like this system because it makes your long-term financial goals as non-negotiable as your necessities. If you find yourself having to prioritize elements of the make or break number over others – for example, transit costs over retirement contributions – you have reached “break” point, leaving you with two options – reduce your bare bones expenses and/or increase your earnings.
When you have inconsistent income, knowing you make or break number is critical as it tells you exactly how much you need to earn to have “enough” each month.
To budget with your make or break number, simply subtract it from your previous month’s income.
You’ll then know how much you have to dedicate toward discretionary spending – like eating out and buying gifts – or how much you can devote to super charging your financial goal getting.
3. Try Zero Sum Budgeting
The make or break number offers a lot of budget flexibility.
Basically, as long as you surpass your make or break point, you can spend your money however you like.
If, however, you prefer a bit more structure, or you want to fast track a certain savings goal, saving up for a wedding for example, consider the zero sum budgeting technique.
Zero sum budgeting gives every dollar you earn a destination, reducing the likelihood of pre-emptive spending on fleeting luxuries when you’re trying to save up for big picture priorities.
Here’s how it works – write down your last month’s income on a piece of paper, then subtract your bare bones budget total, that is, the cost of your monthly necessities – housing, food, etc.
With the remaining earnings, allocate specific dollar amounts for discretionary spending(spending on your wants) and your monthly financial goal targets (as defined in your make or break number, plus anything else you’d like to fund), until you get down to zero, with every dollar accounted for.
For example, if I earned $3,500 last month and my monthly bare bones total is $2,500, I now have $1,000 to designate between my “wants and my goals”. Instead of just letting my spending play out as the month progresses, I can use a zero sum budget to set my spending and savings intentions at the start.
For example, $150 to short-term/emergency fund savings, $500 to retirement savings, $100 to the vacation fund, $200 for entertainment and $50 for gift giving.
To hold myself accountable, I can then satisfy my financial goal targets, (whether it’s setting aside money in savings, contributing to a retirement account or paying off debt), immediately. Meaning, I fund my financial goals at the beginning of the month because I’ve already calculated exactly how much I can afford to contribute to them.
With those dollars already set aside in savings or elsewhere, I’m much less likely to overspend on non-necessities.
By accounting for every dollar, zero sum budgeting adds an extra layer of accountability to achieving your financial goals, even when you don’t have consistent earnings.
“What’s in your wallet?” Most everyone has heard the question posed in commercials for Capital One credit cards. It’s pretty catchy, but perhaps an even more important question is this: What’s in your financial plan?
There is no one-size-fits-all answer to this question. Generally speaking, the reason to have a financial plan is to better balance your current needs with your future needs and goals. And everyone has different goals and needs.
Unfortunately, few individuals have a comprehensive financial plan, one that brings together all elements of their financial life. This inability to see the complete picture can lead people to make very costly mistakes. The bottom line is that many folks will fail to achieve the financial life that they want simply because they failed to create and follow a plan to get them there.
What goes into a plan
In general, a financial plan has two halves: what we call “defensive elements” and “offensive elements.” Below is a checklist you can use. Print it out and put a check mark next to each item that would be appropriate to address in your own financial plan
Defensive elements of a financial plan may include:
- Understanding where your money goes (also known as cash flow analysis).
- Maintaining and reviewing estate planning documents. (This may include a power of attorney, trusts, a will, a heath care directive, the HIPAA release form and other documents.)
- Risk mitigation. (Do you have appropriate insurance policies that sufficiently protect you from financial loss? And are you overpaying for the coverage?)
- Getting debt issues under control.
- Tax planning. (Are you paying the least income tax possible?)
Offensive elements of a financial plan may include:
- Home purchase planning.
- Children’s education planning.
- Retirement planning.
- Analysis of your current investment portfolio.
- Assessment of investing risk tolerance.
- Determining ideal asset allocation.
- Creating an investment policy statement.
- Getting specific investment recommendations.
- Stock options planning.
- Charitable giving.
- Legacy planning.
- Other topics specific to your goals and situation.
Most people get advice on just a portion of their financial lives. Many individuals have an estate planning attorney, for example, or a tax professional or someone to handle insurance matters or provide investment advice. This advice they get is often incomplete and disjointed, because no one is taking the whole financial picture into account.
As a result, a lot can fall through the cracks. You might overspend on a big house, for instance, not realizing that it could mean your kids will have to borrow money for their education, or that you will have to delay retirement. Your financial goals are interconnected, but often the advice people get is not.
Finding a planner to help
So where do you go to develop a plan that incorporates every element of your financial life? You would be well served by an advisor who has the Certified Financial Planner (CFP) designation. This is reserved for experienced professionals who are trained in all areas of financial planning, have passed a comprehensive test, abide by a code of ethics and complete regular continuing education. To find a CFP professional go to CFP.net.
When choosing an advisor, be aware how he or she gets paid. “Fee-only” advisors charge you for their work on your behalf, based on how much time is involved. What’s important is that your advisor shouldn’t be receiving compensation from any source other than you.
Some people call themselves advisors, but in reality they’re just salespeople. They earn a commission when they sell you a product such as insurance or investments. The problem with this approach is that you never know if the recommendation is in your interests or the salesperson’s.
A hybrid or dually registered advisor can both charge a fee and collect a commission. This makes it very difficult to differentiate unbiased advice from what is essentially a sales pitch.
Already high, student loan debt creeps higher each year. In 2013, the average borrower who had taken out student loans graduated from college with $28,400 in debt, according to the Institute for College Access and Success. New estimates for the class of 2015 put that figure even higher, at $35,000.
Meanwhile, the average starting salary for new graduates with a bachelor’s degree is $48,127, according to the Society for Human Resources Management.
That’s a tough way to start your professional career. And if that’s what your situation looks like, it’s probably tempting to just make your minimum monthly payments and know that your debt will be gone in 10 years.
But that’s not the only way to go — and not necessarily the best way. Paying just a little more than the minimum each month can get you debt-free a whole lot sooner and save you a lot of money. To see just how big of a difference it can make, let’s crunch the numbers.
A few assumptions first
Here are the assumptions I made when analyzing the numbers for a typical graduate:
- Total debt of $35,000, all of which was a federal student loan disbursed in 2011 with an interest rate of 5%.
- A minimum monthly payment of $363 on a standard 10-year repayment plan (obtained using the Federal Student Aid repayment estimator).
- Annual income of $48,000 per year, with take-home pay of $3,500 a month (obtained using TurboTax’s TaxCaster).
How much money could you save?
Using these numbers, I ran three different scenarios through PowerPay (a great tool if you want to check things yourself). Here’s how it played out.
Scenario 1: Pay the minimums
The minimum monthly payment is $363, which is about 10% of take-home pay.
If you made every single one of those monthly payments, you would be debt-free in 10 years after having paid more than $8,500 in interest.
Scenario 2: Pay more
Say you found some creative ways to save money and increased your monthly payment to $500, about 14% of take-home pay.
You would be debt-free in just under seven years and you would save yourself $2,853 in interest. All of that — just for finding an extra $137 to put toward your debt each month.
Scenario 3: Pay a lot more
But what if you want to get really serious? What if you feel like your debt is an emergency and you want to get rid of it as soon as possible?
Well, if you could bump your monthly payment up to $1,000 per month, you would be debt-free in just over three years and you would save yourself $5,938 in interest.
And if you wanted to get really crazy and put 50% of your take-home pay toward your student loans ($1,750 per month), you’d be debt-free in under two years and save yourself more than $7,000 in interest!
If your primary focus when it comes to investing is how to find a better strategy with a better return, you’re doing it wrong. The truth is that until you’ve built up a sizable portfolio, your investment return, surprisingly, doesn’t matter that much.
What really matters is your savings rate. It may not be sexy, but no amount of return can make up for not saving enough. You don’t have to take my word for it. Let’s look at a simple example.
Meet Jim and Olivia
Jim and Olivia are both 35. They both make $100,000 per year, have $30,000 in retirement savings, and want to retire at 65 with $2,000,000.
Jim takes the exciting approach of trying to maximize his investment return, and it turns out he’s really good at it! He’s able to earn a 12% return year after year, well above current market expectations.
Olivia’s approach isn’t quite as exciting. She goes the tried-and-true route of choosing low-cost index funds, which earn her a steady 7% return per year.
But there’s one other difference.Because Jim is so focused on his investment strategy, he never finds the time to save more than $3,000 per year. So even with his other-worldly (and, frankly, unlikely) returns, he only ends up with just over $1.6 million. That’s $400,000 short of his goal.
On the other hand, Olivia is a savings rockstar. She carves out enough room in her budget to save 20% of her income, or $20,000 per year. And even with her average returns she ends up with over $2.1 million.
By focusing on saving instead of returns, Olivia met her retirement goal and ended up with $500,000 more than Jim.
When Do Returns Start to Matter?
Wade Pfau, one of the leading retirement researchers, has shown that for the first DECADE of your investment life your annual return has less than a 1% impact on the success or failure of your retirement goal.
In other words, it’s a long time before your returns really start to have an impact on your final outcome. It’s your savings rate that matters most. So when do your returns become more important? Here’s a simple formula you can use to figure it out.
Let’s assume that a reasonable savings goal is 15% of your annual income. And let’s also assume that you will get a 7% investment return per year.
With those assumptions, the amount you save each year will be greater than the amount you earn from returns until your investment portfolio is 2.14 times greater than your annual income (15% divided by 7%). If you earn $100,000, that means that the amount you save every year will have a bigger impact than the amount you earn in returns until your investment portfolio reaches $214,000.
Beyond following some simple rules and creating a “good enough” investment plan, your returns are largely out of your control. And the impact of getting better returns would be relatively small anyways. On the other hand, the amount you save is not only directly in your control but it has a BIG impact on whether you reach your retirement goal.
On my blog, one of the topics I like to cover is explaining how the personal financial advice industry works. Most people get financial advice from someone who is a salesman of insurance, annuities, mutual funds, and other products. You can also get help from someone whose main profession is something related like a CPA or lawyer who offer advice as a side business. The best way to get advice however, is from someone who functions as a consultant.
There are financial advisors out there that charge by the hour for financial advice. They often call themselves financial planners to distinguish themselves from financial advisors. You can find these financial planners through industry associations like the Garrett Planning Network and NAPFA.org.
I say it’s best to work with a consultant style of advisor because the consultant works only for you. Ask yourself what someone’s motivation is. A financial advisor employed by an insurance company or investment company (like Merrill Lynch, Morgan Stanley, Fidelity, Vanguard, etc.) has sales managers above them making sure they sell a certain number of contracts every month. You don’t want to be one of those sales targets. It may work out for you, and there are representatives who do look out for their clients, but ask yourself what their motivation is before signing anything.
By hiring a financial planner that charges fees only and no commissions, you are going to get an advisor who puts your best interest ahead of their own. Ask the advisor to sign the fiduciary oath. Advisors out to meet sales performance targets won’t put their fiduciary duty in writing. By going with a consultant style of advisor, not only will you get sound financial advice, you won’t wonder if the advisor recommended a product because his sales manager told him to.
Many people view retirement as a 30-year vacation, full of leisure and travel. But new retirees often find that retirement isn’t the carefree life they expected. They miss having social interactions, a sense of achievement and daily structure — and as a result, some experience weight gain, marital discord, depression or substance abuse.
And many retirees, especially those who retire early, end up returning to the workforce.
Retirement often looks different today than it has in the past. And as you reconsider how you want to spend your golden years, it’s a good idea to contemplate big-picture life goals and current desires.
Maybe some of those dreams don’t have to wait until retirement.
Rather than leave careers they enjoy, some baby boomers are working well beyond the traditional retirement age of 65 or phasing into retirement over time. Increasing longevity and improving health outcomes also relate to this decision.
But these boomers aren’t necessarily working 40-hour weeks. Companies are growing more receptive to employees’ desires for flexible schedules, including three- or four-day workweeks or remote work. These arrangements free pre-retirees to spend time on travel, hobbies and other goals — and lead to enhanced productivity and job satisfaction.
Work-life balance is the key ingredient to happiness. According to John Wasik’s New York Times article “Facing Retirement, but Easing Your Way Out the Door,” many workers enjoy their reduced schedules so much that they’re extending the arrangements for years longer than they planned.
Figuring out what you want now
In his book “The 4-Hour Workweek,” author Tim Ferriss argues that reduced workweeks are a growing trend for all workers, not just pre-retirees. Technology and the “Uberization” of the global economy allow workers to leverage overseas vendors and virtual assistants and focus on their “highest and best use” skills, in and out of the office. You don’t have to wait for that magical moment in time called retirement.
“Someday is a disease that will take your dreams to the grave with you,” Ferriss writes. “Lifestyle Design is not interested in creating an excess of idle time, which is poison, but the positive use of free time, defined simply as doing what you want as opposed to what you feel obligated to do.”
My favorite parts of the book are the exercises that help you identify what you want to have, be and do within the next six to 12 months. These are similar to the questions I pose to clients when I first meet them. Younger clients often have no problem identifying 10 or more things they want to achieve before they die, but clients who are in their late 50s and older tend to have a harder time completing these exercises and may even focus on their kids’ needs instead of their own.
Here’s a sample of the questions Ferriss uses to get people back in touch with the things that excite them and guide them through the goal identification process :
- What are you good at?
- What could you be best at?
- What makes you happy?
- What excites you?
- What are you most proud of having accomplished in your life and how can you repeat this or develop it further?
Financial planners are life planners
Life planning creates the foundation for your financial plan. When I understand my clients’ goals, I can ensure that their money is allocated and prioritized to help them reach those goals. The financial plan then comes to life in a powerful way for clients. They can envision the future — whether it’s 12 months or 20 years from now.
Does your financial planner ask you questions like the ones above? Is he or she more interested in you or your money? Find a planner who provides holistic financial planning services and helps you start working through your bucket list. You don’t have to wait until retirement to start enjoying your time or your money.
I’m usually pretty frugal. I’ll often do without something I want but don’t need, or I’ll find a cheaper alternative. It’s just my nature.
But just after the holidays, I decided to indulge. I bought a navy blue Brooks Brothers blazer I’ve had my eyes on for years, the kind of thing that never goes out of style and that I can wear in all kinds of situations.
As silly as it might sound, I’m really excited about it! It’s something I’ve wanted for a while and I can’t wait to wear it. But I’m also excited about the deal I got. Instead of paying the full $558.49 price tag, I was able to get it for $260.47.
Here’s how I saved the money, and how you could do the same on your next big purchase.
Step 1: I Waited
I didn’t buy the blazer as soon as I saw it. It probably sat on my wish list for a few years before I actually pulled the trigger. And that waiting did a couple of things for me.
First, it allowed me to find an opportunity to buy it for less. Instead of paying full price, I was able to get it for 50% off during the Brooks Brothers annual sale. That saved me $249 on the price of the blazer, and another $22.81 on sales tax.
Second, I benefited from delayed gratification. I got to spend a long time anticipating the purchase, which is actually a key part of enjoying something. And when I finally did buy it, it felt like a gift. I appreciated it more because I had been waiting for it.
Waiting helped me save money AND enjoy the experience more than if I had bought it immediately.
Step 2: I Looked for Alternative Savings Opportunities
With a little digging, I found that I could buy a $250 Brooks Brothers gift card for just $225. So I bought the gift card, used the card to buy the blazer, and saved myself another $25.
Whether it’s a gift card, a coupon code, or something else, it never hurts to look for alternative ways to save money before buying.
Step 3: I Used a Cash Back Credit Card
When I bought the gift card I used a credit card that earns 1% cash back, which saved me an extra $2.25. Certainly not a life-changing amount, but every little bit counts!
Step 4: I Bought Quality
This is a high-quality blazer I expect to use in many situations for many years to come.
When I spread the cost out over a number of years, it becomes a lot less expensive. Especially when compared to cheaper alternatives that might fall apart, or go out of style, a lot sooner.
Now let’s be clear: this was still NOT a frugal purchase. I spent a lot of money on something Iwanted, but didn’t really need.
But that’s okay from time to time. Nobody should feel like they always have to stick to the bare necessities or like they can never indulge.
Being unprepared for an emergency—anything from a flood to losing your job—can force you into a financial hole. The unexpected can happen to anyone, regardless of age or income level, and it can take years to recover if you are not financially prepared.
A study published by the National Bureau of Economic Research and the Brookings Institution found that 50% of Americans—and nearly 15% of households earning $150,000 or more a year—couldn’t come up with $2,000 in cash to cover an unexpected auto emergency, medical bill, or home repair.
This is why creating an emergency fund should be considered a priority. Maybe you’re just starting a career and are inclined to take your chances. Or maybe you think your net worth has grown enough to make an emergency fund unnecessary. The problem is, you may be wrong. Having a cash reserve can help protect you against unexpected financial difficulties that can have lasting consequences, even if you feel you are in good shape today.
How much do you need?
A.D. Financial Planning recommends the following emergency fund:
- Single person: save and set aside 3 months of expenses
- Two income family with stable jobs: save and set aside 3-6 months of expenses
- Single income family or two income with unstable jobs: save and set aside 6-9 months of expenses
- Self-employed family: save and set aside 9-12 months of expenses
This guidance may not fit everyone. You will need to take into account your expenses, liabilities, and other individual circumstances in order to get a dollar figure that suits your needs.If you’re single and on your own but have family backup, you might be comfortable with three months of savings. However, if you have a spouse, kids, and a mortgage to support, you might sleep better with six months or even 12 months of funding in reserve.
Remember to consider the full list of potential emergencies you could encounter, which might range from a disability or illness to a major housing repair or loss of employment. Make sure you check your disability insurance—either at work or as an individual—so that you know both how long your policy requires you to be disabled before benefits begin and how long they’ll last.
And when you are calculating your living expenses, keep in mind that if you lose your job, you’ll also lose your health insurance coverage. This means you’ll need additional emergency fund money to cover the cost of your health care coverage through COBRA.
Coming up with the cash
Once you’ve decided how much in emergency savings you’ll need, you’ll have to find the dollars to fund your cash reserve. A windfall such as an inheritance or a gift from a parent or grandparent is a great source of cash for starting a rainy day fund. Most people, however, will likely find that the process of building an emergency fund takes place while juggling other saving and spending priorities.
The 10 Steps to Financial Freedom recommended by A.D. Financial Planning gives you clear steps on your financial road for when to start and when to expand emergency fund. In order to build your emergency fund it must be part of your monthly budget. When you reach the target number for your emergency fund, you can start working toward saving for a down payment on a home, increasing your retirement savings in your 401(k) or 403(b) plan, IRA, or other tax-advantaged plan then saving for your child’s education.
Some people view their 401(k) plan as a source of emergency cash, because you can borrow money from a 401(k) if your plan allows. This approach, however, comes with some real perils. If you leave your employer for any reason, you will likely have to pay the loan back within a maximum of 90 days. Moreover, if you fail to pay the loan back in that time, you’ll be subject to both income tax and a 10% early withdrawal penalty.
Others view their credit card as an emergency plan. Credit card balances that are not paid of monthly are fraught with fees, penalties and high interest rates. Using a credit card to bail yourself out of a financial hole is the equivalent of using a shovel to dig yourself out of a hole – you are only going to get deeper!
Keep your rainy day fund up to date
Once you have established your rainy day fund, resist the temptation to dip into it for non-emergencies. If you start to treat it as a backup when you’re running short, it’ll disappear before you know it. As your expenses grow, so should your cash reserve.
There’s a lot of financial advice out there. Enough that your head starts to spin when you try to take it all in, understand it, and figure out which pieces are relevant to you.
I’d like to make it a little easier for you by pointing out some things NOT to do.
Here are five of the biggest mistakes I see people making when they first start trying to improve their financial situation.
1. Obsess Over Investment Strategy
There’s often this feeling that if you can just find the perfect investment strategy, your financial success will be guaranteed.
So you read articles, listen to the experts on TV, and tinker with your investments, all with the hope of finding an edge that puts you over the top.
But here’s the truth: the returns you earn, good or bad, have almost no impact on your bottom line until you’re a decade into the process.
What does matter, a lot, is your savings rate. It may not be sexy, but simply saving enough money is far more important than any other investment decision you can make.
2. Forget About Irregular Expenses
If you’ve tried budgeting before and it hasn’t worked, chances are you’ve been undone by all the unexpected expenses that keep popping up.
Your car needs a new tire. Your daughter has to go to the doctor. Your friend gets married in another state.
Here’s the thing: a good budget knows that these kinds of expenses aren’t unexpected. You may not know when they’re coming, but you do know they’re coming.
And you can make them a part of your regular budget simply by saving ahead for them each month. That way the money will already be there when you need it.
3. View Cutting Back as the Only Option
Cutting spending is often the quickest and easiest way to free up room in your budget for the big financial goals you’d like to achieve. Which is why it’s usually a great first step.
But it’s not the only option.
In fact, the biggest long-term results often come from finding ways to increase your income. So don’t be shy about asking for a raise or starting a side hustle. Those are powerful tools that can expand your world of financial opportunities.
4. Think That Credit Card Debt Is Normal
According to NerdWallet, the average American had $15,310 in credit card debt as of 2015. So I guess debt is normal in the sense that a lot of people have it.
But if you want to be financially healthy, you need to accept that credit card debt cannot be part of your life. It’s actually the biggest obstacle that’s keeping you from reaching your goals.
If you have credit card debt, getting rid of it is almost always a top financial priority. That may mean that other financial goals have to wait, but the sooner you get rid of your debt, the sooner you’ll be able to make real progress towards the things you care about most.
5. Look for Easy Fixes
Unfortunately, there is no easy button when it comes to your finances. The solutions are often fairly simple, but they take time, dedication, and hard work before they truly pay off.
For example, creating an account with mint.com and linking all your bank accounts is a great start to the budgeting process. But the app itself won’t solve all your problems.
You’ll still need to take the time to categorize your expenses, both up front and on a regular ongoing basis. And you’ll need to use that information to take action and make changes in how you use your money.
No single app or tactic is going to fix everything for you. You have to take ownership of your situation and do the hard work to make it better.