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Savings – Your Ace in this Economic Hole
by Kathryn Amenta, Financial Advisor
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We live in an economic time that is unlike anything most of us have ever experienced. Given the upsets and uncertainties, we are all looking for financial security.
Whether you’re affluent, struggling or somewhere in the middle, your best security is having money in savings. Savings give you cash reserves to draw from in the event you’re hit by something unforeseen—job termination or furlough, medical expenses, divorce or separation. Savings give you the means and power to successfully manage what happens to you. And they go a long way in dissipating the free-floating financial fear and sense of impending doom. In these uncertain times, savings are your ace in the hole.
These unique economic times require a different financial strategy: maximizing your savings, while making minimal debt payments and not incurring more debt. However, many people mistakenly believe the primary focus should be maximizing your debt payments. After all, having debt is draining on your money and your life; therefore, putting all your money toward paying off debt can only make you feel more in control and secure. But the truth is that paying down debt doesn’t give you anything to fall back on. At the end of the day, you may have no debt, but you also have no reserves to draw from—if your income or obligations go south.
“But I already make regular deposits into a savings account to pay for my predictable monthly expenses and vacation. Isn’t that enough?” You are off to a great start by following a cash flow plan to manage your monthly income and expenses, pay down debt, and earmark savings for such periodic expenses as property taxes, vehicle maintenance and licensing, and your well-deserved vacation. In addition, it is essential to separate out savings for retirement—and, especially now, prudent reserves to draw from if something unforeseen happens in your life. Today, more than ever, you face a greater potential for having the unforeseen happen. This is not a doomsday stance; it is the reality that we must all embrace if we wish to make the most of our money and feel financially secure.
In creating those separate pools of reserves, you must set boundaries on how you will tap into them. Drawing from your prudent reserves for a new flat screen TV (the deals today seem too good to pass up) may de-stress or satisfy you today, but it sacrifices your fallback if your employer has to cut your hours or your position. Using your cash reserves to pay off your debt may give you a sense of control today, but it weakens your safety net. Write clear boundaries for how you will use each pool of reserves—just as you create a clear plan for managing your monthly income, expenses and debt pay-down.
How much should you hold in prudent reserves? Financial advisers used to recommend 6 months of living expenses. I am now among the experts recommending 9 months to a year of living expenses. For most of us, that is a really tall order—especially if you’re starting from zero. My advice is to start today, even with baby steps. Work toward building 3 months of prudent reserves, then another 3 months, then another—making sure that you follow clear guidelines for use of those reserves. One strategy is to place your prudent reserves in a bank account that does not give you access to frequent withdrawals, but does earn you a higher interest return.
The good news is that the economic downturn has motivated most of us to change our self-limiting money behaviors. We are moving beyond our old spending and debting addictions, and actively working to clean up our money baggage. Nationally, we are beginning to place greater value on savings—just as our parents and our grandparents did. Now is the time to make savings your money focus—along with creating an enjoyable and stress-free lifestyle in sync with your means, while reducing your debt incrementally.
One thing is certain: the international and domestic economy will always change. Having your personal economy in order—through a sound cash flow plan and prudent reserves in savings—makes you more financially nimble. You will be able to make better financial and lifestyle decisions regardless of the economic climate. In this changing economy, savings is your ace in the hole.
© 2009 Kathryn Amenta
Kathryn Amenta is an expert Financial Advisor to individuals, couples and business partners. She uniquely focuses on overcoming personal barriers to financial success, including underlying beliefs about money, spending, saving and self-worth. Through her proprietary cash flow tools, she has helped clients across the US learn to successfully manage their money, create action plans for their future and enjoy financial security in any economy.
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