FRIDAY, APR. 13: A large portion of the working population cannot wait for their pay cheque to hit their bank account, only to spend, spend and spend to the last penny, and then wait for the next pay cheque to arrive.
Others are systematically dividing their money in compartments; one compartment for bills, one compartment for savings and one compartment for spending.
How do you manage your money and plan for emergencies?
Start with grasping that nothing will run like clockwork and emergencies will occur.
Emergencies are relative, so it is important to define for yourself and your circumstances what an emergency actually is.
For example, you may find that you now need to care for someone who is very ill and at the same time your employer is closing down your department and is making you redundant.
Perhaps your car breaks down suddenly, or you are lacking college funds for your child whose first term starts in less than a month.
We suggest that you begin to build an emergency fund that should be large enough to carry you through three to six months’ worth of household expenses.
If you have a job that is sales oriented and commission based, you should look towards saving an amount equivalent to eight months of household expenses.
If you do not currently have an emergency fund or find it difficult to save money, the key is to start small, with the understanding that accumulating one month’s worth of expenses will take some time.
While you are building, the funds are not to be used to pay for vacation costs, buying any type of present, funding parties and luxurious activities simply because we can do without these things if there is no money.
Try to keep your emergency fund in a bank separate from where you do your regular banking.
This avoids the temptation to withdraw the funds. Instead why not set up an account with an investment company, which will limit the daily exposure to your emergency fund and will discourage you from using it unnecessarily.
The money you are saving in your emergency fund should be invested in short-term, liquid investments that would allow you to convert the investments to cash without risking the principal of the investment.
Simple investment solutions including money market mutual funds, 30 day CDs or even treasury bills that will give you the preservation of principle with the prospects of investment growth.
Start simply by depositing $100 per month into your investment account.
As you build your emergency fund, remember the key is to reduce your spending and avoid debt.
An emergency fund should not consist of using your credit card or taking out a line of credit.
Why would you go into more debt?
Obviously if you don’t have the money to pay outright to begin with, then you don’t have the money to pay off the debt.
The basic purpose of an emergency fund is to tide you over and cover the financial gaps, which include unexpected expenses or unexpected loss of income.
It is there to give you some time to make the necessary adjustments when a gap develops between income and expenses.
Planning your financial future and preparing for bumps in the road will give you peace of mind knowing that you will have the right tools in place to cover yourself and your family.
Carla Seely is a Senior Wealth Manager at AFL Investments. She can be reached at 294-5712 or firstname.lastname@example.org.