Step Two: Begin To Reward Yourself!

Make Your Emergency Fund Work

Greetings again! It appears that things continue to look up for me as I continue to fund my own emergency fund and should reach the pivotal $10,000 mark by December 30, 2006 if I save conservatively and plan to spend money on health, entertainment, and food. The benefit of the spending plan will show you if you’re doing a good job of plugging the holes in your monthly expenses drains while identifying areas to improve spending.

Living in New York is expensive especially on my entry-level engineering income, but that simply means that I will have to plan my spending a bit more conservatively than most. Soon, I’ll no longer be here. It’s almost been a year, but I’m hanging on OK. I don’t see what’s so hard about this living below my means stuff. Perhaps in the future I will have my Financial Tower threatened. We’ll see.

But to today’s topic—what to do with that emergency fund money?! Hopefully it’s not sitting in your checking account. If it is, you’re punishing yourself. If you’ve decided to delay gratification and are committed to saving for emergencies, why not make that money gain some interest—and I mean REAL interest! Or maybe you have your money in high-interest savings already. If so, you can stop reading now! I’ve put some of the well-known savings account brick-and-mortar guys to the others:

Bank Name	Savings Account APY%	Money gained per $1000 saved*
Wachovia	0.35%*	$3.50
Washington Mutual	0.75%*	$5.50
Bank of America	0.55%*	$5.50
ING Direct	4.00%	$40.00
Emigrant Direct	4.50%	$45.00
HSBC Direct	4.80%	$48.00

*Up to 2,500. After that, there are marginal increases. This is fine print. Some assembly required.

Well, where do you stand? Look at the return rates. Keep in mind that this is the money you get for saving per thousand, per year. So if you save 5,000, multiply the interest dollar amount by 5. (This does not count reinvestment interest, where you money can really take off). But what if you don't HAVE $1000? Not a problem. The online banks have no minimum and no fees. So you can start with $1.00 or $100. Not too shabby for the Online Banks, eh?

Now, which one would you opt for? For simply letting your money sit there and accumulate interest, you can get a fairly decent rate that’s FDIC-insured. (This means that your returns are guaranteed.) This is the amount in cash you would have after letting it sit for one year—and it should sit—remember this is your emergency fund. Emergencies as in “the car broke down and I cannot pay for repairs out of my checking account without using the credit card,” but not “John Legend is performing and I cannot pay cash/debit for it without going into credit card debt.”

Always seek to maximize your returns—let your money do it for you. I suggest you start with the bottom three, and each has its own strengths/weaknesses. ING Direct is most user friendly. Emigrant Direct has usability concerns, and HSBC Direct has the highest rate, but they will make you jump through hoops to get started. Remember. This is your money. You worked hard for it. Now make it work hard for you.

Step One: The Budget Spending Plan

Step One: The Budget Spending Plan

By this time you should have $1000 set aside for hard times. Plus you should be working diligently towards your 3-6 month expense account for long-term well being. Click Here to get started on this step if you haven’t already.

I’ve tried to avoid using the word budget when it comes to planning your future, but sometimes when you change the terminology you change the behavior. A spending plan is designed to, well, plan your expenses. No matter how much planning of your spending you do “in your head,” you never know how much spending that slips through your hands as “little purchases.” It’s good to track them. Consider the words of Arkad of Babylon from our Millionaires’ Bookshelf reading list classic The Richest Man in Babylon:

Budget thy expenses that thou mayest have coins to pay for thy necessities, to pay for thy enjoyments and gratify thy worthwhile desires without spending more than nine-tenths of thy earnings

(Emphasis Mine).

This stresses a very good point. In a spending plan, you include all spending you plan to do, including entertainment, eating out, etc. If you are not sure how much you plan to spend, estimate—including taxes. However, you should ensure that you do not exceed 90% of your income. (You’re saving 10% anyway, remember?) And for those of you who tithe regularly, this should be included as an “expense.” Saving 10% of your earnings doesn’t absolve you of giving 10% as a Christian to a place of worship of charitable organization. When building your wealth, never forget the importance of charity.

The easiest way to develop your spending plan is to simply list all of your incoming funds (wages, bonus money, etc.) and subtract the outgoing funds. The number should be as close to zero as possible, but never less. (It could be more). You have to make every dollar holla—in other words, every incoming dollar you get should be diverted somewhere—to savings, investments, movies, food, utilities, car payments(if any), credit card payments, snacks, clothes, health care, transportation, etc. Set a weekly target for your spending and WRITE THEM DOWN. This is extremely important because if left to your own devices (its all in your head) you will cheat yourself. State at the beginning of each week how much you plan to spend on food, entertainment, etc. Include all bills

You then work to stay within your spending targets. Because of the debit-card well problem (I'll explain in a later article), I suggest you use the cash-envelop method for your day-to-day purchases. The reason is because you don’t see your money going away (you’re not as conscious of it as if you’re seeing cash leave your hands). For safety (and simplicity) you should probably use the debit card when on trips/vacations, and making electronic payments (cable/internet, utilities, etc.)

This will take a little time to adjust to. But I have faith you can do it. Not only will your eyes be opened to your actual spending, but you’ll feel in control of your money and where it is going. Mastery of your current expenses is among the first steps to building your tower. It makes no sense to carry a bucket around with a hole in it demanding that you need more water to keep it full. Your spending plan helps you find where to plug the holes.

Coming Soon: I’m perfecting an excel file where you can customize to your needs.

Millionaires' Bookshelf

Required Reading!

So if it’s your desire to become a millionaire? Great! But becoming a millionaire isn’t easy. It’s simple though. What does it take? An advanced degree? Education? Access to the world’s well-kept secrets? Actually, the most legit millionaires have the worst-kept secrets because they spill all their beans of their paths to wealth. Whether you start a business, pinch pennies, systematically save, or a combinations of them all--consider the thoughts, writings, and practice of some of the millionaires in our society. Click here to see the quotes of some of America’s least known millionaires, courtesy of the It’s Your Money blog. Oh yeah—you gotta read too! The current books I recommend:

Millionaires I’ve Studying/Have Studied:

- The Richest Man in Babylon, George S. Clason (My Grade: A-)

- The Total Money Makeover, Dave Ramsey (My Grade: A)

- Think and Grow Rich, Napoleon Hill (My Grade: B+)

Millionaires in my Reading Queue

- Rich Dad, Poor Dad, Robert Kilosaki

- The Millionaire Next Door, T.J. Stanley and W.D. Danko

I add books as I hear and read more. If you have additional suggestions, let me know (in the Comments section) and if the philosophy of the book is cool, I’ll credit you with nominating another book to the Millionaires Bookshelf!

Step Zero: The Emergency Fund

Your Protective Wall Against Life's Little Challenges
by Charles J.

Pertinent in the path to financial freedom and success is the establishment of your preliminary emergency fund. I suggest about $1000 in liquid capital (cash) in the bank. Once you have set aside this small amount, you should begin your spending plan, keeping in mind that you should spend 90% of it and save 10% for yourself—at the least. Every 10% should go into a high-interest account and reinvested over and over—this is an emergency fund after all. Consider the words of George Cason’s character, Arkad of Babylon, who spoke this law of saving and paying yourself first in The Richest Man in Babylon:

"I too carried a lean purse and cursed it because there was naught within to satisfy my desires. But when I began to take out form my purse but nine times [for every] ten I put in, it began to fatten. So will thine."

Besides, when building your Financial Tower, isn’t it a good idea to build a wall around your progress so that unforeseen plunderers will be discouraged to disrupt your progress? In other words, when troubles arise like this, this, this or even this, would you feel more secure if you have some "just in case" cash to fall back on rather than falling into credit card debt--or worse yet--filing for bankruptcy?

So create a small emergency fund, and then work towards establishing 3-6 months worth of expenses, depending on your comfort level (how long could you survive if you lost your job or house tomorrow?) Well, how much exactly should you save? The best estimate is to find out how much you spend in a month and multiply it by 3, 4, 5, or 6, depending again on your comfort level. Next, you'll see one idea of how to do that.