You know why – because it’s hard. But, it doesn’t have to be. Here’s how to start your own rainy day fund without making major sacrifices.
Pay Yourself First
This is such simple advice. Yet, almost no one does it. And yet, if you did, if you did this one simple thing, most of your problems would be solved. Set aside at least 10% of your income after tax to savings. You can set aside 15% before tax too. Either one will work.
The important point is to pay yourself first before you pay anyone else. Before you pay your creditors. Before you pay the IRS even. Now, you shouldn’t skip out on your taxes of course. But, the important point that you must get out of this is that you need to treat your savings as something that’s not optional. It doesn’t come last in the order of priorities. It needs to come first.
Start at 10%. Then, work it up to 15%. Then, get it up to 20%. Keep going until you reach 45% of your income. That might see high, but it’s absolutely doable.
And, once you get to this level of savings, it almost doesn’t matter what you do investment-wise.
You will also establish really good financial habits by adopting a high savings rate. You’ll find that you’re less stressed out about stuff, in general. You won’t have the same kinds of money problems you have now. And, most importantly, you’ll appreciate what you do have. You won’t take material possessions for granted.
Tap Your Home Equity
Most people don’t think of home loans as a form of savings, but they are. Your home’s equity does represent debt, but it’s a loan against an asset you own and control. So, in that sense, it’s a form of savings.
And, it’s great for one-time expenses.
And, because you are forced to repay the loan, you are essentially going to restore the full value of your home when you repay the loan. Otherwise, you’ll lose your house. And, most people don’t want to lose their home so there’s a great built-in incentive there.
Put Savings In A Separate Account
Money that you save should go in a separate savings account. From here, you make withdrawals and pay for things you want. But, for the most part, your rainy day fund should live in a dedicated account – either savings or checking.
A separate savings account ensures that your savings doesn’t get mixed up with your other bills and expenses, and that you don’t accidentally spend money that you were suppose to save.
Work On Paying Down Debt
One of the hardest things for people to do is pay down debt. It seems like such a simple thing, but it’s not. There are many different programs out there on the Internet, but the simplest one is to pay down your debts starting with the highest interest rate first. Once you’ve gotten that debt paid off, you move on to the next highest interest rate.
You keep going in this fashion until all your debts are paid off. In most cases, you will end up paying off your debts and pay the least amount of interest. Of course, for large loans, you may end up paying on them for a very long time.
That’s OK because once you do finish paying off your last debt, all of those debt payments go into savings. And, it adds up really fast.
Focus On High Savings Rate Over Higher Investment Yields
Everyone is chasing investment yields. It’s the “in” thing right now. And, that’s understandable. When you can’t save much money, you need to earn a higher rate of return. But, that’s often a faulty strategy. Why?
Because, it rarely works out in the end. That’s why the average 401(k) balance is just $16,000 for people between the age of 22-34. For those between 35 and 48, the average balance is under $70,000, and for people over 48, it’s between $100,000 and $150,000. The overall average is just $100,000 or so.
That’s not much, especially when you consider that you need at least $600,000 in savings to create a $40,000 to $50,000 a year income, and that’s converting all of that savings to monthly income, with a small amount of interest added.
If you want to keep your savings fully intact, then you’ve need $1 million or more for the same amount of income.
Michael Rakeman has be in the direct mortgage lending business for over a decade. As a Christian lender, Mike has made it is his mission to help others achieve their home ownership dreams. He is an owner of Fellowship Home Loans and attended State University of New York College at Geneseo. Living in Long Island, he spends free time with his family and working with local churches.