Instant Satisfaction or Delayed gratification of Wants?
What do you do? Do you walk in and buy another mobile phone on impulse to add to your collection of phones? Do you pause to consider the opportunity cost of buying the phone and consider saving instead? On a daily basis, the average individual is faced with the choice of deciding on either instant satisfaction or delayed gratification in every ramification of life. Unfortunately, many of us choose the Instant Gratification Desire and consequently, many do not have a savings plan in place to cater for expenses during retirement, unforeseen emergencies, loss of employment and so on.
What is a Savings Plan?
A savings plan is essentially the contribution of money on a regular basis in order to reach short to long term financial goals. These may include education expenses, family vacation, or that inevitable rainy day. Most financial planners or advisers suggest saving at least 10-15% of your income as well as setting aside at least three to six months of your monthly income in cash or liquid investments for emergencies.
How to A Create a Savings Plan?
Change your mindset and focus on delayed gratification. Once achieved, your financial plan should consist of the following key components
1. Identify your savings goal or objective: What are you saving for? Are you saving to buy a house, retirement or a family vacation. An important point to note is that your goals must be specific, mensurable, achievable, realistic and time bound (SMART).
2. How much can you save?: If you do not have a budget, this is the best time to create one. Review your budget to determine how much you have available to save. The recommended savings amount is at least 10-30% of your income. Note that this is a guideline and you are at liberty to exceed this recommendation where possible.
3. What are the available options?:These include savings account, money market funds, mutual funds etc. Factors to consider include accessibility, amount and frequency of savings.
4. Method of disbursement: An effective way to save is to put a direct debit in place. Essentially, the amount due is automatically deducted from your account and placed in the savings vault.
5. Review: It is important to always review your progress towards achieving your savings goal or objective. In the course of the review period, you may have to make some adjustments upwards or downwards with regard to your contributions.
Every time you are faced with the choice of instant satisfaction or delayed gratification, do yourself a favour and ask yourself, do I have a savings plan in place? If your answer is yes, then it might be a good idea to consider increasing your contribution to your savings plan before gratifying an instant purchase desire
EMERGENCY FUND
An emergency fund can mean the difference between financial failure and financial success. Not only must you develop discipline to accumulate one, but an emergency fund will prepare you for unexpected setbacks and reduce your dependence on borrowing money, most likely at high interest rates.
Carefully examine your expenses and use the information to develop an emergency fund goal, see how much you can save each month, and identify unnecessary expenses, or wasted money. Make a plan to build up an emergency fund and decide how you want it allocated. Finally, use your emergency money wisely.
Do you have an emergency fund? What strategies did you use to build it up? What circumstances have forced you to access the funds in the account?
Emergency Fund Essentials
Emergency fund investments need to be guaranteed or at least very low-risk. They also must be liquid and readily accessible.
1. Low/No Risk
Unfortunately, investments often realize a rate of return that is directly proportional to how much risk they carry. This is why you’ll need to be satisfied with low-interest bearing accounts in your emergency fund. Checking, savings, and money market accounts and physical cash are good choices.
Just make sure your bank accounts or bank-guaranteed investments carry government insurance. Treasury bills, notes, and bonds have traditionally been good choices for safe investments as well. But since the guarantee attached to government-issued instruments has come into question, these may be treated as a very low-risk investment option, but not ones that are necessarily guaranteed.
The same holds true for other highly rated bonds and bond funds. Such investments may constitute a portion of your long-term emergency fund, depending on how comfortable you are taking on risk.
2. Liquidity
This represents how quickly your assets can be converted to usable cash. A savings account, for example, is 100% liquid because it already is cash. Bonds, though, have to be sold before you can use them and you must wait for the cash settlement period to pass (one day for government issued securities, three days for all others).
In some cases, cash products can also be problematic. Fixed Deposits, for example, come with penalties if you withdraw money early. Understand the penalties of Fixed Deposits you are considering or already own, since they can and do differ. Like bonds, CDs should constitute a portion of your long-term emergency fund.
3. Accessibility
A couple of years ago, I needed immediate access to my cash, but it was in an online savings account and took three days to get. That wasn’t soon enough. Luckily, my parents had enough money in their emergency fund to tide me over until my emergency fund could be accessed.
This experience is one reason I decided to create a short-term and a long-term emergency fund. My short-term account can be accessed immediately. And for bigger issues, the short-term account has enough to hold me over while I wait for my long-term funds to come through.
Aside from keeping cash on hand, make sure you have a debit card and ideally check-writing privileges attached to your short-term emergency fund. That way, you can access money at any time in virtually any place.
Benefits of creating an emergency fund:
A vital point is that an emergency fund reduces the need to use high interest debt, such as credit cards as a last resort. There are many studies that show that those without emergency savings are more likely to accumulate debt.
Furthermore, this is life anything can happen at any time. There could be a worldwide credit crunch,
birth of a child, natural disaster, death, etc. It is better to be prepared than to be sorry.
On a final note consider having an accountability partner such as a personal finance coach or financial planner to ensure you keep up with your commitments.
The truth is that everyone has an emergency fund; the difference is that you are either earning interest or paying interest.
Key Tips for opening an emergency fund:
· Open a separate account with a bank that you do not use regularly.
· Make sure you open a savings account and not a current account.
· Resist the temptation to dip into your emergency fund.
· If you are married speak to your spouse and agree to resist the urge to dip into your emergency fund unless there is a real emergency.
· Define what a real emergency is.
· Increase your deposits as time goes on.
· Once you have reached your desired goal, you can either move the goal post by increasing your emergency fund or start to work towards achieving another financial goal. Consider the option of having both a short-term and long-term emergency fund.
· Keep your debit card in a place that is not easily accessible.
How Big Should Your Emergency Fund Be?
Your emergency fund contain SIX months’ worth of your monthly income or THREE months' worth of your monthly expenses. Now, the new financial wisdom is to have at least six months’ worth of expenses saved up. Of course, building an emergency fund can be difficult during a trying economy. If you are trying to get out of debt, one approach is to first build up a $1,000 emergency fund, and then redirect your efforts toward eliminating your debt. Then, once you’re debt-free, continue to build your emergency fund further.
The amount of money you put in each of your short and long-term emergency funds will depend on what you can afford and what you’re comfortable with. For my needs, I keep about $2,000 in the short-term fund, while I aim to build up six months’ worth of expenses in my long-term fund.