The question that I am posing, and hoping to answer, is how much money is enough for your emergency fund. An emergency fund is intended to be used, of course, in an emergency. My definition of an emergency is a) when you lose your job, b) when something unexpected happens, c) a cushion in case of unintended expenses.
A good suggestion that I got from Million Dollar Journey is to begin by having $1000 in an emergency fund, then pay off your loans, etc. By having $1000 set aside, you should never need to go to your credit card, or lines of credit or anything like that in the case of an emergency. If your motor goes on your car, or you need to buy a new roof or whatever, this money is intended for stuff like this, so you don't need to borrow in order to cover it.
In these tough economic times, there is a threat for everyone of losing his or her job. Of course, you are saying, "This could never happen to me", but for everyone that is a realistic concern. I would recommend having at least three months expenses saved up in an emergency fund in case of job termination. What are three months expenses? Basically these are your fixed expenses (less investments): mortgage (or rent), food, monthly bills, loans, etc. If you lose your job, likely investments and variable expenses will be pulled back. In three months, you should be able to recover financially and find another job (one would hope).
In the same way, if you have a rental property, you should also have an emergency fund set up. What this fund will be is at least three months worth of rent. This should cover if there are unexpected vacancies, as well as some money left in case of emergencies (or maintenance). You don't want to have to tip into your personal finances in order to maintain your property, or if a month or two goes by without any renters, so if you are going this route, please make sure that you have enough float cash to cover.
Some people use a line of credit for an emergency fund. I would recommend against this as a shift in mentality. If you have money saved for your emergencies, it is much more positive than having to borrow money for emergencies. It is another level of freedom that you wouldn't otherwise have. If you lose your job, do you really want to have to pay back a line of credit?
My recommendation to everyone is to open up a Tax Free Savings Account and put $1000 in there (or at least contribute every paycheque until you are there). Then if something bad happens and you need some cash, you will have it. Remember to try to minimize your consumer debt!
Showing posts with label expenses. Show all posts
Showing posts with label expenses. Show all posts
Wednesday, August 12, 2009
Wednesday, July 15, 2009
Disposable Income (aka the Bucket Method)
In this post I will discuss how I deal with my disposable income. I try to limit myself so that I can control my spending, with the extra money left over goes towards extra debt repayment.
The idea is simply that you live on cash for your paycheques. This method is used in the show Till Debt Do Us Part, where the host of the show Gail Vaz-Oxlade comes into a person's life and rearranges their monthly spending forcing them to live on cash. It seems outrageous at first, but to live on cash, and then when you run out of money you stop spending makes a lot of sense.
I decided to do this beginning in 2009 and it has worked wonders. My goals involve me dropping my liabilities, and since I have limits on my spending, there is never a paycheque when I fall short and have to dip into savings. Here are the splits:
Groceries $100:My girlfriend and I share groceries and I budget $100 every two weeks. This is my share, so we will alternate grocery weeks and try to stay under $100 for the two of us. Our health related goals are to lose weight, so we have vowed (and stuck to it) to not eat anything out of a box (basically pre-made). We try to eat lots of vegetables, but although they can be expensive if you change your meals until the vegetables are in season you can eat reasonably.
Spending Money $80:That's right, I give myself $80 to spend on whatever I want every two weeks. I realize that most people who read financial blogs consider themselves to be frugal, so me spending $80 every two weeks in whatever way I want may seem extravagant to some, but to me it is a fair amount. I don't stop for coffee, and bring my own lunches. Another goal of my girlfriend and I is to not go out for supper anymore (before she moved in we probably went out for at least one breakfast and one supper per week). I now do the cooking (which she loves) and I am financially healthier for it. I have also given up pop and junk food, which used to help rid myself of my spare change.
The rest of my buckets are collecting money for long term expenditures. In this way, I will never have to make purchases for large amounts and then hurt myself financially. Some people will say that I should put this money in a savings account rather than under my bed (the buckets are actually on my night table), but if the money is in my account I can easily access it, but when it is in a bucket, I have to reach into it, thus "stealing" from myself.
Home Repairs $20:Every paycheque I deposit $20 into a bucket for home repairs. Then when I need paint, or a new faucet, or what have you, rather than taking it out of an emergency fund, I can just grab cash and pay for it. I live in a condo, so very expensive repairs are done by the condo board.
Gifts $20:Every Christmas I tend to go into the hole spending on Christmas. By depositing $20 every other week, that will give me $520 at Christmas to spend. Doubtless I will spend more than that, but not that much.
Clothes $20:Everytime someone says, "buy a new jacket", or "buy some new jeans", or "buy some new winter boots", I used to cringe and say "I don't have enough money". Now, by putting a little aside, its actually possible to go shopping for clothes and actually being able to look to buy.
School $20:This is to pay for extra courses that I will take. Each year, I take a course in the summer that costs $899, and then teach summer school so that I can afford it. In this way, I can get most of my course saved up for.
Video Games $20:Yes, I am 31 years old and play video games. But like everything else on this list, if you save up $80 over two months to purchase the new Guitar Hero, you feel less bad about it (at least I do).
So the questions for you are: does this make sense? Can you see yourself doing something similar? Finally, when I get a raise in September, should I adjust by buckets? I was thinking of making another bucket for "miscellaneous debt repayment", so that it is not a forced repayment, but when I get $100 I put it against one of my loans. Otherwise it could be a "vacation" bucket, or I could just ignore the extra bucket idea and put it in the "pay off your debt"!
The idea is simply that you live on cash for your paycheques. This method is used in the show Till Debt Do Us Part, where the host of the show Gail Vaz-Oxlade comes into a person's life and rearranges their monthly spending forcing them to live on cash. It seems outrageous at first, but to live on cash, and then when you run out of money you stop spending makes a lot of sense.
I decided to do this beginning in 2009 and it has worked wonders. My goals involve me dropping my liabilities, and since I have limits on my spending, there is never a paycheque when I fall short and have to dip into savings. Here are the splits:
Groceries $100:My girlfriend and I share groceries and I budget $100 every two weeks. This is my share, so we will alternate grocery weeks and try to stay under $100 for the two of us. Our health related goals are to lose weight, so we have vowed (and stuck to it) to not eat anything out of a box (basically pre-made). We try to eat lots of vegetables, but although they can be expensive if you change your meals until the vegetables are in season you can eat reasonably.
Spending Money $80:That's right, I give myself $80 to spend on whatever I want every two weeks. I realize that most people who read financial blogs consider themselves to be frugal, so me spending $80 every two weeks in whatever way I want may seem extravagant to some, but to me it is a fair amount. I don't stop for coffee, and bring my own lunches. Another goal of my girlfriend and I is to not go out for supper anymore (before she moved in we probably went out for at least one breakfast and one supper per week). I now do the cooking (which she loves) and I am financially healthier for it. I have also given up pop and junk food, which used to help rid myself of my spare change.
The rest of my buckets are collecting money for long term expenditures. In this way, I will never have to make purchases for large amounts and then hurt myself financially. Some people will say that I should put this money in a savings account rather than under my bed (the buckets are actually on my night table), but if the money is in my account I can easily access it, but when it is in a bucket, I have to reach into it, thus "stealing" from myself.
Home Repairs $20:Every paycheque I deposit $20 into a bucket for home repairs. Then when I need paint, or a new faucet, or what have you, rather than taking it out of an emergency fund, I can just grab cash and pay for it. I live in a condo, so very expensive repairs are done by the condo board.
Gifts $20:Every Christmas I tend to go into the hole spending on Christmas. By depositing $20 every other week, that will give me $520 at Christmas to spend. Doubtless I will spend more than that, but not that much.
Clothes $20:Everytime someone says, "buy a new jacket", or "buy some new jeans", or "buy some new winter boots", I used to cringe and say "I don't have enough money". Now, by putting a little aside, its actually possible to go shopping for clothes and actually being able to look to buy.
School $20:This is to pay for extra courses that I will take. Each year, I take a course in the summer that costs $899, and then teach summer school so that I can afford it. In this way, I can get most of my course saved up for.
Video Games $20:Yes, I am 31 years old and play video games. But like everything else on this list, if you save up $80 over two months to purchase the new Guitar Hero, you feel less bad about it (at least I do).
So the questions for you are: does this make sense? Can you see yourself doing something similar? Finally, when I get a raise in September, should I adjust by buckets? I was thinking of making another bucket for "miscellaneous debt repayment", so that it is not a forced repayment, but when I get $100 I put it against one of my loans. Otherwise it could be a "vacation" bucket, or I could just ignore the extra bucket idea and put it in the "pay off your debt"!
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