By Patrick Jamieson, Insurance Advisor
The verdict is in and your financial situation could be improved. It has become obvious to you that the situation is not sustainable for the long term and something needs to be done. Your head is spinning wondering what to do first, hoping that there isn’t too much pain in making changes but also not knowing exactly what to do.
Firstly, congratulations for realizing that something has to change. Acknowledge yourself for this very important first step, it is a step that some people never recognize.
Depending on your financial situation you may be able to start somewhere along the saving path but if this is the first realization then you need to start from the beginning.
Saving Level 1 – establish an emergency fund of $1,000. This is to be used for emergencies only. It is intended for items like water heater failures or vehicle repairs and is NOT to be used for your cable bill. Having these funds available give you peace of mind that you’ll still be able to pay rent and buy groceries even when something unexpected happens.
Saving Level 2 – build an out of work fund equal to 3 to 6 months of monthly expenses – rent/mortgage, car payment, utilities, groceries, medications, etc. The purpose of these funds is to give you a cushion in case you are not able to earn income due to a lay-off or other circumstances beyond your control, a global pandemic for example. This fund will allow you to survive while you look for a new job or another way to earn an income.
Saving Level 3 – Saving for the short term: 1-2 years. This could include anything that you may want or need to purchase in the near future like clothes, household items, weekend getaways.
Saving Level 4 – Saving for medium term goals: 2-10 years. Perhaps there is a vacation that you want to plan or you need a different car. It is a great idea to plan for these things well in advance and cover some or all of the costs before they happen.
Saving Level 5 – Saving for long term goals: 15-25 years. That seems like such a long time but it’s important to plan for retirement, lifetime goals and your children’s education.
It is important not to get ahead of yourself. If you already have Level 1 covered, focus on Level 2 before you jump to Level 5. And remember if you need to dip into your emergency fund or your Just In Case fund, make sure that you replenish them before you move onto the next step. Always maintain the protective layer of cash in case something should happen.
Good luck and congratulations on taking the first step.
Photo by Lindsay Henwood on Unsplash