Budget Builder Tip #3: Giving Yourself A Cushion

So, you’ve found out how much your are actually spending in a month, gone through your receipts and got rid of the things you don’t really need….now what? What are you going to do with all that extra money? Here’s a clue:

SAVE IT!

But, I hear you say, wouldn’t it be better to pay off my credit card debt or get ahead on my mortgage? That’s a good idea in theory because you’ll be paying less interest BUT chances are you ran up your credit cards because unplanned emergencies just kept popping up.

It’s a very easy cycle to get into. Most people start out with just one thing they need to use their credit card for. Their car breaks or the eavestroughs give way in the middle of a rain storm. It’s the third week of the month and their paycheck is starting to run out, so what’s the solution? Credit cards.

When you live from paycheck to paycheck, it is nearly impossible to cope well with unforseen expenses. The problem is, this just perpetuates the cycle. Increased credit card payments mean less money to save to emergencies, which means you have to rely more on your credit card, which mean higher payments. I think you can see where I’m going with this!

Add up all the money you’ll be saving from your monthly expenditures and figure out what percentage it is of your yearly salary.

Say, for example, you earn $847.34 per week before taxes. That works out to $44,061.68 per year. Ideally, you should have enough in your emergency fund for three to six months living expenses but that’s a tall order when you’re first starting out. Let’s start at a much more manageable 10%.

10% of our sample income works out to $4406 for a year or $367.18 per month [income multiplied by 0.1, divided by 12].

Everybody gets tempted when a great sale is on or there is a new product that your kids really want. The best way to avoid prematurely depleting your savings is to put them in a separate account that does not have a bank card, cheque book or internet banking. Basically you are forgetting about the cash until a genuine emergency comes up.

Any left over cash you have above and beyond the 10% should go on debt repayment, so you wasting your hard-earned cash on interest.

This may seem like a giant mountain at first but it will get easier as each month goes by. You’ll adjust to your new spending habits and feel good about staying on top of your budget. Best of all, the savings will grow right before your eyes.

Be sure to tune in tomorrow for tips on how to build a budget that works.