When I meet with clients at Halcomb Singler, LLP, in Carmel I often find out people don’t have enough money to set anything aside for an emergency. I have written many blog postings regarding the importance of spending less than you save, but instead of just telling people it is important to save money because emergencies will happen I have thought of a way to encourage savings through rewards.
For our example, lets say that Jake and Sarah are attempting to build up a savings account with 6 months of their living expenses. This is a daunting task for most people, but especially for Jake and Sarah who have just purchased their first home and want to make a lot of improvements. There are a laundry list of improvements and just “stuff” in general that Jake and Sarah want to buy for their new home. It is just not realistic that Jake and Sarah are going to save their 6 month emergency fund before buying anything for their home or doing any improvements to the home. Without getting into the discussion that maybe it wasn’t the best idea for Jake and Sarah to buy the house in the first place, how can they save money while also dealing with the reality that they will be spending some money on their home.
Clearly Jake and Sarah do not have enough money at the moment to both fully fund their 6 month emergency fund and to buy what they want for their home. This is where Jake and Sarah need to prioritize. First, I suggest that they make a list of what items or improvements they would like to buy for their house. Next, they should sit down together and put them in order of importance from most important to least.
Next they should determine the amount of money they will need for a fully funded emergency fund. In our example lets say that Jake and Sarah need to save another $30,000.00 prior to being able to have 6-months of living expenses set aside. I suggest that Jake and Sarah put together a spreadsheet and break down the $30,000.00 into smaller goals of $3,000.00. So, when Jake and Sarah have saved $3,000.00 for their emergency fund they can buy item #1 on their wish list for their new home. However, Jake and Sarah should be sure not to dip into any of the money that they have saved in order to buy item #1. Instead once they save $3,000.00 they save again for item #1. Once they have saved enough to purchase item # 1 they should save another $3,000.00 prior to purchasing item #2.
The spreadsheet might look something like this:
Savings Goals Reward
$3,000.00 Have living room painted
$6,000.00 Purchase bedroom set for 3rd bedroom
$9,000.00 New A/C Unit
$12,000.00 Window treatments for downstairs
The spreadsheet can go on and on. I feel this is an effective way for people to build up their savings in a manner that is based on small goals, which is much easier to achieve than by just saying that you should save 6 months of living expenses. In addition, once you have met a savings goal you are able to reward yourself by spending money on something that you want. It is important to note that the cost of the items/improvements Jake and Sarah want to make after hitting each savings goal probably should be less than the amount that they are saving for each benchmark. The more expensive the goal item is, the more that should be put toward the emergency fund savings goal before you start putting money back for the reward item.
Will this system work for you? Remember, you can set up this system in whatever increments you like. The increments don’t have to be the same for each goal. Just figure out a plan and stick to it. Emergencies will happen. Your car will need to be repaired, you will need a new water heater, furnace, etc. Having money set aside for these emergencies will allow you much more peace of mind when they do happen, keep you out of consumer debt, and will hopefully allow you to avoid Chapter 7 or Chapter 13 bankruptcy.
Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.