A Time to Save – Part 2

You can read Part 1 here. On to the example...

(We’re using the example of someone who earns $1000 per month, and because they live with family only has $200 in regular expenses. However, they need to budget with worst case scenarios in mind.)

So let’s take that $1000/mo. Pretend you have to pay $720 for rent, $80 for food, and $100 for utilities. If you can think of other expenses independent living would create you might add them in too. So for us that comes up to $900, subtracted from $1000, it leaves you $100 for other expenses. This may be a far more realistic range for your “spending money”, even if currently your expenses are only $200. The difference between $900 and $200 is $700. If you can discipline yourself to bank that money into savings instead of spending it, you’re going to be in a much better position to weather life’s upsets. And if nothing bad happens...well, look at all the money you’re saving.

So while your living expenses are low, where should that $700 go?

This goes back to our 5 priorities:

Priority 1: Needs
Priority 2: Small Debts
Priority 3: Emergency Fund
Priority 4: Large Debts
Priority 5: Big Dreams and Entertainment

Even while prepping for your worst case scenario, you shouldn’t ignore your current needs. If medication and transportation, etc. mean that $100 in spending money is not going to cut it, that’s okay. Adjust your savings amount so that your current needs are still met. If your vehicle needs a $500 repair, it’s okay to take a break from savings to deal with that.

Small Debts are things you can pay off in a single month with a lump payment. So yes, take care of that speeding ticket, library fine for the book your dog chewed up, or $10 you owe your friend for pizza the other night promptly. That way they won’t be hanging over your head or accumulating additional fines and penalties if things do get worse.

Next is the emergency fund. Now, if you’re living at home so you can pay down your student loans more quickly, then yes, you should continue to do that. But it’s important to have some liquid assets that are quickly accessible for emergencies. So maintain the minimal payment on your loan until you’ve put away 6-months worth of living expenses. Let’s say your regular student loan payment is $350, (if you’ve taken care of the first 2 priorities) that leaves $350 for savings. If you decided that $7,200 is your ultimate EF goal and you’re starting from $0, then it will take you almost 2-years to save that amount. If you’re feeling pressure from your relatives or worried about student loan interest, you might stair step those goals.

For example:

For the first 2 months, $350 towards EF and $350 towards the debt.
For the third month, $300 towards EF and $400 towards the debt.
.....(EF now at $1000)
Continue for the next 8 months, $300 towards EF and $400 towards the debt.
.....(EF now at $3400)
Last month of the year, $200 towards EF and $500 towards the debt.
.....(EF $3600, so you’re at your half way goal)
Continue for the next 6-months, $200 towards EF and $500 towards the debt.
.....(EF $4800)
For the next sixth months, $100 towards EF and $600 towards the debt.
.....(EF $5400)

While not your ultimate goal at the same speed, it’s still a good cushion and you’re definitely knocking years off that student debt. You can continue the $100 to EF and $600 to student debt until you hit your goal or use that degree to get a higher paying job.

Once you have an adequate Emergency Fund, throw the full weight of your income at your large debt(s).

More details in Part 3 (told you this got long).