Let’s think for a moment about some of the things that the average person is motivated by. I mean really motivated, at a basic instinctual level. Of course there is food and water or, sustenance. Then we have shelter and housing. There is also a drive to reproduce.
One motivation that I believe is ever-present, but often overlooked, is the drive for safety. Everything about our lives is permeated with the innate desire to minimize risk (except for you thrill-seekers!) and protect ourselves from harm.
We have home security systems that are monitored for us 24 hours a day. We employ police who patrol and protect us by enforcing the law. A deciding factor for most automobile purchases is the various safety ratings and awards that the vehicle may have received. The list goes on, and on, and on.
Are there any areas of life where people skimp on protecting themselves or their families by minimizing risk? Of course there are, but I think there is one area that the average person is missing the mark. Personal finance.
Now, I’m not talking about minimizing the risk of your stock or mutual fund investments. Nor am I talking about using insurance like life insurance to protect income and provide stability. Both of these are important and we will surely talk about them at a later date.
No, what I’m talking about is much less glamorous, much less sophisticated, much less fun. I’m talking about savings accounts.
Out of all of the personal finance topics available for discussion, it feels like savings accounts (or emergency funds, or capital surplus, etc) are the simplest, yet the most oft neglected. Why is this?
From an early age, many of us can remember our parents spending time teaching us, or at least encouraging us, to save our money. Didn’t everyone at one point have a piggy bank?
Having cash available to us is such a powerful tool that many people, sadly, never get to experience. So many people operate on the knife’s-edge of a paycheck-to-paycheck lifestyle. There is no extra cash available in the budget; if faced with an emergency purchase, many people resort to debt, either through a loan or a credit card, or go without something else necessary in their lives. One large purchase can disrupt their whole financial universe.
Avoiding high-interest, long term debt is one of the tenants of this site. The idea is to have assets that earn us interest instead of us paying the interest to credit card companies and lenders. So, to me, having a tool to avoid this is crucial to building wealth and stability. If a person has a pile of cash on hand to pay for an unexpected expense that arises, this can alleviate much of this stress.
If you are a person that is living without any kind of savings, the good news is that building a savings account is very easy. I recommend opening a separate account from your checking account (either at the same bank as your checking account, or a different one if temptation to dip into savings will be high for you), and immediately putting any extra cash into that account before you do anything else financially, like paying on debt or investing. Fill this account until you have an amount that makes sense based on your situation and income potential.
The amount is up to you. Dave Ramsey’s Baby Steps recommend saving $1000 first ($500 if you are lower income or on a shoestring budget), and after paying off all of your debts except your mortgage, you build this up to 3-6 months worth of expenses. Your amounts can vary, of course, depending on your situation, but this gives you an idea of what I’m talking about.
If you are someone operating without savings, give this a try. See how you feel. See for yourself how that one small step can provide you a cushion of comfort that feels just a little bit better. It could be the jumpstart you need to begin paying down debts, and begin swinging payments from the banks to yourself.