Some people think all financial info is boring. I actually find a good deal of it interesting but this tip is pretty boring. Building a cash safety net is an important part of your personal finances. We have explained previously the very simple idea that you don’t buy what you can’t pay for. If you can’t pay for it this month, don’t buy it.
But that leaves out one thing. Even if you do have the cash you should be building up a cash reserve before buying luxuries. The typical advice is to build up 6 months of expenses in cash (rent or mortgage, food bills, utilities, health care, etc.). Now actually building up to that level can take awhile and forgoing all non-mandatory expenses until you have that saved is not usually reasonable. But as part of your personal finances building up an cash reserve is important (even if it is boring).
A significant portion of downward spirals in personal finances are started when people have emergency expenses and have to borrow that money (since they don’t have cash reserves). If you are over say 26 and don’t have a cash reserve yet saving for it should be part of your monthly budget. How quickly you build that up is a personal decision but I would say a 1% of the target amount (so if you are aiming for a cash reserve of $20,000 then $200/month).
If your finances don’t allow that, then do what you can. But realize that is one of the weaknesses in your personal finances and try to fix that as soon as possible.
Very important personal financial allocations for you to put first include: current needs (food, car payment, rent/mortgage, utilities…), insurance, creating a cash reserve, retirement savings, saving for future purchases. Then there are luxuries and treats, such as: eating out, vacations, cable TV… Many people put current needs, luxuries and treats fist and then say they don’t have the ability to do what is responsible. That is not often true for those that actually have an internet connection to read this blog.
Related: Buy less stuff - Saving for Retirement - How to Use Your Credit Card Responsibly - Trying to Keep up with the Jones
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So what you should do now is what you should always do. Have cash savings. Pay off your mortgage (don’t over-leverage yourself - don’t take out equity just because you have some). Save for retirement…
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if you do run into problems and get stuck dealing with debt collectors in addition to the financial trouble you may find yourself very frustrated and stressed…
[...] other needs you create a great foundation for your finances. Start saving for a house, a new car, create an emergency fund… Then you can create a situation where the only loans you need to take are for a house and [...]
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