A recent survey from bankrate.com caught my attention: only 40% of Americans have $1,000 in savings to pay for an emergency. This means that 60% don’t!
I started to reflect on this stressful situation. I also reflected on my own personal rules of managing my family’s daily finances, the lessons that I taught my four now twenty-something children, and lessons I’ve learned from my daily money management clients. My simple but steadfast goals can be summarized as follows: spend less, save more and pay off debt.
1. Spend less than you earn (or, as one of my daughters says, “live below your means”)
a. This is a common-sense money management philosophy.
b. There are only two choices to make when your expenses are greater than your
income: increase the money coming in or decrease the money going out. This may
include asking yourself before each spending decision, “Is this a need or a want?”
2. Save more
a. Make savings a priority-a line-item in your budget.
b. Automate your savings. For example, each month have money automatically
taken out of your checking account and transferred to a savings account or a
c. Set specific savings goals (i.e. house purchase, college funding for children,
retirement savings, etc.).
d. If you have to choose between saving for your retirement or saving for your
children’s college, fund your retirement plan. When you retire, you will not be
able to borrow money from a bank to pay for your retirement expenses. On
the other hand, children may borrow for their college tuition (or they can
choose to attend a less expensive college).
e. Save for emergencies. For example, if you own a car, you are going to incur
automobile repairs. If you own a washing machine, it’s going to break down
at some point. Emergencies happen and you will have to incur emergency
3. Pay off debt
a. In an ideal world, no debt is the best debt.
b. Know the difference between “good” debt versus “bad” debt. “Good” debt is
borrowing to buy an asset that will increase in value (home mortgage) or
borrowing to potentially increase your future income (student loan). “Bad”
debt is borrowing to buy things that lose their value (automobile loan and
credit card debt).
c. Only use a credit card if you have the means and the discipline to pay off the
balance in full each month. There are no exceptions to this rule: don’t make
the purchase if you can’t pay your credit card balance in full at month-end.
d. Do not retire until ALL debt is paid off.
So, how do you spend less, save more and pay off debt? You need a budget, a plan for your saving and spending. Everyone, at every stage in life, needs a budget. You should document your plan, whether it’s with pencil on paper, an Excel spreadsheet on your computer or a mobile app on your smartphone. Compare your plan with actual income and expenses at month-end, and
update your budget for the next month. When I help my clients plan and track income and expenses, most spend less in the future because the budget process helps them focus on their actual spending.
I asked my adult children if there was any advice that has helped them better manage their daily finances. The main lesson they learned from me was to save (“pay yourself first”). I guess someone was listening!
Take these steps to make sure that you have money for an emergency. Plan for both the expected and the unexpected, and your financial situation will be strengthened.
Beth Carroll is a CPA and a Professional Daily Money Manager. Her company, Cornerstone Money Management, LLC, helps seniors in their homes with billpay, financial organization and cash flow management. You may reach her at firstname.lastname@example.org or 401-323-4895.