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Oftentimes, when deciding how to best spend your pay check, it is hard to see the unforeseeable future. For example, what happens when an unexpected cost arises? Will you be ready? And, how can you make a monthly budget that takes into account costs that you might not be looking for? Unexpected expenses can come up at any time. Literally, in the blink of an eye, your financial situation can change – and even become dire – if a major crisis occurs. Broken furnaces, leaky roofs, and even worse yet – medical emergencies – can alter you expenses and take every dime that you have saved. While there is no foolproof way to stop emergencies from happening, there are ways that you can be more prepared financially so that you are not left with an empty savings account and large credit card bills in the event of an unplanned incident that requires fast cash.
Funding Your Emergency Account Although it is essential to save for your future, the first order of financial business for everyone should be to fund an emergency account. Most financial advisers recommend that these accounts should hold between three and six months living expenses. It is best to keep these funds in an account that provides both safety and liquidity. This way, you will not lose money in a down market, and you will be able to access your funds quickly should you need them right away. Therefore, the best type of account in this case would be either a bank savings account or a money market. These accounts do not earn a very high rate of interest. Yet they do provide the peace of mind in knowing that your funds are safe and secure. Keep in mind, though, that an emergency fund should be just that – a fund for emergencies. It should not be used for groceries, clothes purchases, or any other type of regular expense – no matter how tempting it may be. Don’t worry if you do not have a lump sum amount of cash with which to start your emergency fund. In building up this account, try to set aside a certain amount of money every month until you have built up your account to a sufficient amount.
Creating – And Sticking To – A Budget
Once you have firmly established a way to fund your emergency account, you should also put together a household budget. Budgets have been known to be extremely helpful in both reducing unnecessary expenses and saving money. Your budget will consist of your fixed and variable expenses. Fixed expenses are the regular bills that you pay every month that will typically stay the same. These can include your rent or mortgage, auto loan payment, and insurance premiums. Because they are the same every month, fixed expenses are typically easier to anticipate and plan for. In addition to fixed expenses, your budget will also contain variable expenses. These are the bills each month that are a different amount such as electric, gas, and food. It is also with variable expenses that you have more control. By reducing costs in certain areas, you can save money – and in some cases, even eliminate entire costs altogether. For example, you could save the amount of variable expenses that you owe each month by eliminating premium cable channels, reducing your electricity usage, and using coupons and thus spending less on groceries or other household items.
One great way to really see where all of your money goes every month is to closely track each and every expense – even down to a 50 cent soda that you may purchase from a vending machine. For one full month, keep a sheet of paper where you can easily see it such as on the kitchen counter or stuck to the refrigerator. Every evening, write down each item that you purchased that day – regardless of how large or small. At the end of the month, add up all of your expenses. This can be a real eye opening experience, as most people are surprised at how much they really spend. Once you have done so, go back through the list and read over what you spent money on. In doing so, you will be much more mindful the following month of how even the little things can add up to big overall expenses. This is also a great time to go through each expense and see if there is a way that you can reduce or eliminate it. Then, reallocate each dollar that you save directly into your savings.
Jennifer Ricci is a financial consultant and writer for Cedar Education Lending. She also works with families and students to understand their finances and budget for a successful future.