Monthly Archives: March 2015

How to Save Money – Your Reserve Funds

To build true wealth you have to save money. It requires discipline and consistency but it is possible. The more you save and less likely you will incur debt. The more you save the better you will sleep at night.

Your Three Reserve Funds

The purpose of your saving and investing should dictate the investment strategy. To start out I advise you create three reserve funds: a Rainy Day Fund, an Anti-Debt Fund and a 10% Fund.

Rainy Day Fund

Everyone, almost, advises people to create a Rainy Day Fund. They call it different things, but it serves the same purpose. It is for those unexpected expenses: medical emergencies, job loss, short term disability, and when the roof caves in. This is for the things you do not plan on doing.

These things happen. The transmission goes out and you have a mechanic’s bill for $1300. The hot water tank stops working and it costs $600 to replace it. You wish these things would not happen but they do and you have to be prepared for them, because if you are not either you go without hot water or you go into debt. This is not for the things you do plan to buy, like your next car or your child’s education or your new suit of clothes. This is for real emergencies.

You should begin setting aside money for this right away. If you can set aside 10% of your take home pay for this fund. If you cannot save 10% do two things: save what you can and work on reducing debt and eliminating unnecessary expenses until you can save 10%.

There is no magic amount to save in this fund but a good rule of thumb to start is to save six month’s expenses. If you spend $3000 a month on the essentials: food, rent, utilities and gasoline, then you need to save six times that – or $18,000. If you lose your job you are not forced out on the street. You can begin looking for work but you will eat and have a roof over your head for at least six months.

Once you have that six month’s emergency fund set aside continue to add to this fund little by little. As the years go by it will grow until you have two or three times that much. The more you have, the more secure you feel, the better you sleep and less likely you will have to go into debt to put food on the table.

If you take home $3500 and save ten percent, which is $350 per month, you will have $4200 at the end of one year, you will have your $18,000 in about four years. Work hard at it and you will save more and get there quicker. I suggest you work on getting there quicker, because the quicker you get there the faster you can start on your next fund.

As your income grows you will find you spend more on the “essentials”. Some of those essentials will increase in cost due to inflation alone. You therefore need to add to your Rainy Day fund from time to time, at least annually, to keep up.

Anti-Debt Fund

Try as you might you are unlikely to have enough cash on hand to buy the big ticket items that most people need: the new (used) car, the new clothes washer, the new mower for the lawn. Too often people succumb to the siren call of credit card companies and Buy Now Pay Later offers and go into debt for these things. As a result you are constantly making payments on these debts – money you cannot save and invest, and you pay all kinds of money in interest that make other people richer and make you poorer.

Start out by paying yourself the equivalent of a small auto loan payment. Increase the amount as your budget allows. In time you will have a reserve to buy those larger ticket items for cash, which is the only smart way to buy them, and you can avoid debt. That is smart.

10% Fund

Once you have saved the minimum in your Rainy Day Fund you can switch that saving payment to yourself each month into your 10% Fund. This is your long term savings for investment – it is your wealth building and retirement fund. It is never used for emergencies, for automobiles, for clothes, for leaky roofs or for vacations. It is a long term fund for your future financial security.

Start by saving 10% of net income but shoot for ultimately saving 10% of gross income – that is more difficult for most people but it is possible for most. It means living below your means, driving modest used cars, wearing quality but low cost clothing, and not eating out often. It means living frugally. It means rarely if ever buying $4 lattes or paying full price for movie tickets. (That is what matinées are for.)

Every time you are tempted to spend a dollar on a non-essential expense ask yourself if your Rainy Day Fund is full or if your Anti-Debt fund is full or if you have paid yourself the 10% this month. Until you have paid into one of those you do not spend money on non-essentials.

Most employed people who are frugal in their living and manage their money carefully can have their Rainy Day fund fully funded, their Anti-Debt fund full and be started on their 10% fund in five to six years. By year seven you should have money in all these funds.

Seven years is a long time you say. Yes it is. You can continue to borrow money, spend lavishly and not set aside money, in which case seven years will pass and you will have little to show for it. Or can use this method of saving and at the end of seven years avoid incurring almost all debt, feel secure against most emergencies and begin building your wealth.

Dan Murphy

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