The Pew Charitable Trusts recently released a report that found most families are just one setback away from financial disaster. What exactly does that mean? Families are only able to replace less than one month of their income through liquid savings.
That’s a scary fact. All it takes is one illness or a car breakdown to create a need for a large amount of cash. Most financial emergencies will be out of your control. The only way to combat this problem is by paying yourself first and saving enough money to break this cycle.
The Root of the Problem: Paycheck-to-Paycheck Living
Many Americans live paycheck-to-paycheck. This is not a comfortable way to live. The Great Recession can be blamed, as well as slow wage growth. The Pew report found the typical worker had a 22% increase in wages between 1979 and 1999, but only 2% growth between 1999 and 2009.
How To Break the Cycle
Breaking the cycle will take some compromises and discipline. Here are some suggestions:
- Make a budget. This is a must if you want to get your finances on track. Figure out where your money needs to go, expenses that can be cut, and keep track of your spending.
- Set realistic goals. Making a long-term plan helps, but having some short-term goals may help give you the motivation you need. Start with saving enough to be one paycheck ahead, then a month ahead and then focus on a strong emergency fund.
- Download mobile banking apps. These apps will allow you to check your finances anywhere, anytime. This can make it easier for you to keep on top of your spending.
- Collect your coins. Start a coin jar and cash in when it’s full. You’ll be surprised how much can come out of that.
Pay Yourself First
Saving is much easier when you follow the “pay yourself first” approach.
Here’s how it works: as soon as you get your paycheck, you put a certain amount in your savings account before paying any other bills. You can even set up direct deposit to take care of this automatically.
By putting this money away in your savings immediately, it won’t be sitting there in your checking account looking ripe for the spending. You have the ability to tap into your savings account for emergencies, but the temptation is removed from your checking account.
Make a promise to yourself to try the pay yourself first approach with your next paycheck. Developing and sustaining this habit will create a savings cushion for you, and you’ll be less likely to face financial disaster should you encounter a setback.