I am hearing so much talk about the bailout, failure of the bailout, failure of the financial markets, and the impending doom we are all promised is rolling up our driveways. However, I find myself not alone from my friends and peers in asking “What exactly can I do about all this?” We are not economic powerhouses with the ability to stimulate or restart the economy. If you’re anything like me then you have a couple of car loans, one or two credit cards, and a comfortable apartment or small house. You have a 401k investment plan into which you have added a percentage of your paycheck. In your daily life you will awake, go to work, pay your bills, eat, and sleep. Your options to solve the crisis in the financial markets are somewhat slim. We all would like for the “financial crisis” to be over but we lack the means to directly effect that change. Furthermore, you are probably looking for ways to ensure that over the next six months you can still feed your family and pay the rent/mortgage. Grander designs will have to wait for a fuller wallet.
So what can you do in the meantime to help ensure that you are able to ride out this crisis? There are a couple of things. Please bear in mind that I am not a financial advisor, nor a qualified or certified financial consultant in any way. I have opinions and observations, all of which could be (and probably are) entirely false and misguided. However, I have had many friends over the last few weeks ask me for ideas about keeping themselves safe through troubling times. To that end I will share the ideas and techniques I am using to insulate myself from whatever economic change is forthcoming.
Float (or Rainy Day Fund)
The first thing is the concept of a float or a rainy day fund. We all know that a nice little savings account would give us a warm fuzzy feeling, however seemingly fewer of us have succeeded at putting one together. A float is there to simply insulate you from short term bumps in the road. It should only be used as a last resort to help cover emergency expenses and should be the first thing restored after the emergency need has passed. The biggest problem most people face with a float is how to get one started so lets start by addressing that first and then progress from there.
Starting a Float
It takes only a small amount of discipline to successfully put together a float. The most important thing is to get a system going that you can stick to. The technique I used to get a float going was to first establish a weekly amount that would be set aside for the float only. I chose $50 but you can tailor it as necessary. The key is not to set aside the $50 at the start of the week and then hope that you won’t need it by the end. All that does is put $200 aside in a box that is then spent at the end of the month when money runs out. Instead try to actively find items during the week that you can consciously do without before you spend the money. Then take the money you were about to spend and set it aside (in cash if possible) in a box or envelope clearly marked “Float money – DO NOT SPEND”. When the float has got $50 in for that week then any other purchases are fine to make. At the end of the week (or month depending upon your schedule) take the money from the box or envelope and deposit it into a savings account. Doing the deposit in person is important because it mentally reenforces the activity and helps to form the habit and strengthen the system.
For example, I play a lot of video games and will periodically browse the local stores for new games I’m interesting in buying. I would sometimes pick out a couple of second-hand titles that I would like. Think carefully before a purchase. Putting one of the titles back on the shelf, taking out $22.95 from my wallet (I rounded to $23) and then going home with only one second-hand game still made for a great Sunday afternoon. It also put $23 in the float for that week. As another example, I sometimes get home from work and think “I’m tired. Why don’t we just get a take-out delivered tonight?” Instead think whether you could just heat something from the freezer and put $20 into the float box instead. It soon reaches $50. In fact, simply putting back an impulse purchase at the store and putting $4 into the float can help a lot too. If you keep up the habit of getting to $50 each week then you’ll end up with a $2,500 savings account in just under a year. This is a really great float. It may take until next fall to get it built up but the point of this post was what things you could be doing right now to protect yourself against the effects of an economic downturn. It’s hard work and frustrating at times (I hate putting games back on the shelf) but the lowered stress and peace of mind a float can bring is enormous. I promise it will significantly improve the quality of your life to have a float account.
Reduce your Debt
Debt is a pain. None of us want debt and yet nearly all of us have it. We all mean to pay it off but somehow the action doesn’t line up to the original intention. Lowering your debt is something that takes focus. The companies that have loaned you money do not want you to pay it off. They want to keep charging you interest on that loan and turning a profit. If you simply put the debt on the shelf in your mind and pay the minimums each month then the companies you owe money to are going to keep fixing the system in their favor to take as much money as they can from your pocket. The only way to reduce your debt is to face up to it, research it fully (most people could not tell you what they owe), and then set forth a plan of action to pay it off. If you have multiple credit cards I would consider targetting one first. Just pay the minimums on the other cards and devote additional resources to getting rid of the one focus target. Choose the one with the lowest amount owing. The mental reward of actually clearing a card is very valuable and by choosing the card with the lowest balance you ensure that feeling is as close as possible. Try to find additional ways to send a little extra money to pay off this card every month. Similar to the tricks for the float account, setting aside just $10 here and $20 there can quickly add up to a large additional payment. Remind yourself every month when you pay your bills of all the reasons why you shouldn’t put anything on a credit card. Don’t add to your debt. You’re already building up a float for emergencies. You do not need these credit cards. They are an anchor on your life. Find ways to pay them off and avoid using them at all costs! When you’ve paid off the first card then turn to the next one and focus on that. You’ll be surprised how quickly you can pay them off when you focus your sights on them.
Pay Yourself Early
Humans need rewards. We respond well to rewards for actions. Positive reenforcement has been shown to be the most effective way to encourage beneficial behavior. At the start of the month (or whenever you receive a paycheck) take out a little money and set it aside. This money is yours for the month. I know that sounds strange but something we all must realize is that our paycheck is not our money. That money belongs to our landlord, the electric company, visa, and a whole host of other people we have already promised to pay. Take aside a little money from your check as soon as it comes in and make that yours. Subtract it from the total in your head of how much you got paid. If your after-tax total is $1,300 then take out $100 and say to yourself “Great, I earned $1,200 this check.” That $100 is yours to spend on yourself and to do with whatever you like. However, like an allowance once it is gone then it is gone and you must wait until next month to get more. By setting the money aside you are making the remainder of your budget much more predictable. If you don’t set the money aside then you will end up spending it anyway. As the month progresses you will find that you need this or that and spend it because you need a reward. However, because you aren’t tracking it you will probably spend more than $100 and also make your budget that much less predictable. Ever find yourself at the end of the month wondering why you’re $40 overdrawn because a bill went out that you’d forgotten about? Paying yourself at the start of the month and then leaving the rest of the balance alone will really help to mitigate that.
These are just a few ideas of things that you can start doing today to help your financial situation. Wall street may get a financial bailout when they make a mistake but I can assure you that you and I will not. We need to take steps to protect ourselves, especially if tough times are ahead. Taking action now will pay off bigtime over the next couple of years if you are cautious and careful. Don’t go out on a big comfort spending spree. Instead reduce your risks and get a savings account started. You’ll thank yourself when the day comes that you need it.