An emergency fund is one of the most important pieces to get in place when you're figuring out your financial puzzle.
For many people, our economic realities make putting money aside to sit-and-wait for a just-in-case scenario can feel maddening -- or seem plain mad. Yet emergency funds are arguably the most important element of a financial safety net. Perhaps second only to “spend less money than you make,” the financial advice to “build an emergency fund” is among the best you can follow.
What exactly is an emergency fund? It is cash set aside to be used only in an unexpected one-time situation and only to prevent imminent danger to one’s physical health. In other words, an emergency fund is money you keep to bail yourself out when a true emergency arises.
Sadly, emergencies will happen; they’re a common part of life. Knowing what is and isn’t an emergency will give you the guidelines you need to manage your just-in-case cash fund. An emergency is a one-time unexpected situation that threatens your access to basic food, shelter, clothing, and/or medical care. Specific threats to each category include the following:
Food – not having enough basic food to survive, having no money for food due to an unexpected situation, already using the food bank and still not making it.
Shelter – receiving an eviction notice, having essential utilities cut off (water, electricity, heat in cold months).
Clothing – lack of basic appropriate clothing to keep you safe and warm to due an unexpected situation.
Medical care – injury or illness that requires medical attention
What do each of these situations have in common? They threaten your very existence.
I want to dwell on medical care for one moment because your well being – financial and otherwise – is tied to your access to health care. You need health insurance; consider this absolutely non-negotiable. Making a choice not to pursue medical care is a decision that threatens your physical health in the short- and long-terms. Becoming sick is never expected, but it is a reality each of us faces even if we seem otherwise healthy. Even with insurance, co-pays, deductibles, and out-of-pocket expenses often lead people to not access these essential services. Having money on hand to cover those costs is crucial. When you have insurance, make sure you are familiar with its terms, copays, and out-of-pocket maximums. Once you know what you may have to pay in the worst-case scenario, add the amount to your emergency fund target goal.
How much money do you need in an emergency fund, and how do you put any money away on your current salary?
Conventional financial advice suggests individuals save enough to cover three to six months of expenses, plus your worst-case out-of-pocket medical costs. We would love to say there’s an easy way for the a person paid minimum wage to reach this goal in a timely manner, but the reality is that saving that much cash for a minimum wage worker takes a very long time. So instead of looking at a large and daunting number, start small. Aim to create a $500 cash emergency fund.
Why $500? This amount will cover small, unexpected events like an emergency doctor visit, a basic car repair, a trip to the emergency vet with a pet, or being short on rent or food. It’s a number within reach of nearly everyone’s budget with some planning, and it’s a good start. If you put $20 away a month, you can have $500 in about two years. Increase your monthly savings to $42 to complete this goal within one year.
When you decide to create your emergency fund, it helps to keep the money separate from your usual living expenses. Keep it in a separate account, ideally a high-interest rate savings account often offered by credit unions and online banks, or set it aside as cash in an envelope or somewhere you will not be tempted to use it.
To build up your fund, consider utilizing these suggestions:
When you’re saving, keep in mind that it’s okay to let this money sit as cash or in a savings account. It may be tempting at some point to invest it to grow your money, but the point of an emergency fund is for it to be there right away when you need it. It’s your safety net. Leave it alone. You don't need it to do anything fancier than sit and wait for you to need it.
Moreover, a credit card is not an emergency fund. If you can’t afford to pay for an emergency need the moment it’s before you, how are you going to afford it later with compound interest added on? A $300 emergency on a credit card may end up taking 18 months to pay off and cost $42 extra in interest. Using a credit card to cover emergencies puts individuals in a bad situation where, on top of the stress of the emergency itself, they’re now in debt. Any further complications or a second emergency situation could damage their financial stability for years.
Consider buying term disability insurance. Employers are required to carry workers compensation insurance, which covers you in case you are injured on the job. Many large companies also give, or offer, disability insurance, which covers you in case you are sick or are injured from something other than a workplace injury. Many bookstores are too small or can’t afford to give employees disability insurance, so purchase a term disability policy in case your health suffers and you are unable to work.
Wherever you decide to begin, getting an emergency fund together is one of the best forms of protection you can give yourself. You’re the only one who’s going to look after you, so be the guardian you would want on your side and be kind to yourself. Make a plan, stick to it, and keep going.
You can do this!
If you have any questions, feel free to email Justus Joseph at Squirrel and Nest.
Today we discuss how to build good credit, but first we'll quickly talk about what a credit score is and why it matters.
Credit scores are an assessment of how responsible you are with money that has been loaned to you. These scores assess your credit history and how well you handled borrowed money.
Why It Matters
Lenders use credit scores to determine how much it costs you to borrow (interest rates), how much you can borrow (credit limits), and what kinds of credit you can have (high-quality loans vs. “revolving credit” [credit cards]).
People with higher credit scores have access to better services and lower interest rates as they are perceived as less of a risk.
People with lower credit scores end up with poorer services and higher interest rates. This means it is harder for these people to borrow, and when they do borrow, carrying a balance costs them much more money due to the high interest rates.
Categories Used to Determine Your Credit Score Include
In order to score well in this category, you need to stay below 30% of total limit available to you. If you utilize more than 70% of your credit and do not pay it off, you will lose points on your credit score. Here are the potential scores based on your credit usage. To have an Excellent score, you need to utilize less that 20% of your available credit:
Not Bad 41-60%
Pay on time. Nonnegotiable. Never be late for a payment. Your most recent payment history counts more than your past history. Here are the potential scores based on how often you pay on time:
Not Bad 98%
Length of Credit
This is measured by the longest standing account you have open -- if you close that account, you won't have as long a history.
Poor 0-3 years
Not Bad 3-6 years
Good 6-9 years
Excellent 9+ years
Multiple lines of credit in different types help raise your credit. Potential lines may include a line of credit, credit card, home loan, student loan, etc. That said, too many can hurt your credit score. (Getting to Excellent on this one isn't actually a goal we'd recommend). Here are the credit scores associated with number of accounts:
Not Bad 6-12
Anytime you apply for credit or have your credit score checked, it is indicated as an "Inquiry" on your credit report. Too many inquiries will negatively affect your credit, as it suggests you are trying to borrow a lot of money within a short time frame. Inquiries stay on your report for two years. Here are the credit scores associated with credit inquiries:
Not Bad 5-10
When dealing with your lenders or collectors, being rude can lower your credit score -- no joke! Be polite when you speak with your lenders, no matter how frustrated you might be feeling. Here are the credit scores associated with instances of derogatory remarks:
Not Bad 2
It's also important to know there's more than company that offers and evaluates your credit score, Equifax often being the best known. Each company will weight your credit score differently, but they generally stay within a similar range of about 300-850.
Bad 550 and lower
There you have it. Credit demystified. Keeping good credit habits will not only help credit score, it's going to help your overall financial situation and may keep you out of significant debt.
If personal finance has a golden rule, it’s this: spend less than you make. If you can only follow one piece of financial advice, that’s the one. Yet, for however simple that advice seems, most people don’t actually follow it. If you’re not, you’re borrowing money and paying compound interest on the amount you borrowed. For some purchases that may make sense, like a mortgage on a house. Entering into debt should be done – if done at all – intentionally and in an informed manner. But that’s not what’s going on when we spend beyond our income, and with easy access to credit it takes no effort to do so.
How then do you begin to follow this golden rule? Track what you spend. You need to know – and understand – where your money is going and how you are using it.
This can be frightening and intimidating. We are taught to attach value to finances akin to “having money is good, and not having money is bad.” With this mentality, people in financial difficulty often judge themselves and enter a self-defeating loop. If you give into your inner negative, judging voice, you won't be able to see your financial situation with honesty and clarity to be able to make the changes you want. The challenge you face is to detach yourself from this judgment. Cultivate an objective mind when you look at your money. This is the essential in developing a healthy financial perspective.
To track your spending, you really need to record every monetary transaction you make. This includes money coming in (paycheques, loans you take out) and going out (purchases, rent, debt repayment, etc). I personally prefer to do this manually by keeping a pen-and-paper record of all transactions in a blank book or journal. If you're more technologically inclined, or if technology will get you to stick with your tracking exercise, use a spreadsheet. By manually entering every transaction, you are connecting with, and understanding, your money and the habits you've developed surrounding its use. You can tally it either as you spend or receive money, or you can keep your receipts and enter them at the end of each day, but you have to do this consistently. By each day's end, you should know exactly how much money you have and where every cent that has gone.
If manual entry seems daunting, consider a bookkeeping app like Mint.com. This website and phone app allows you to link your bank accounts, credit cards and loans, and will let you track all of your income and spending automatically. You still have to do some work as it doesn’t always categorize transactions correctly, so you still have to go in and categorize your expenses, but you no longer need to manually enter each purchase you make. Some people find this a much easier and better system. Just keep in mind you are losing out on the advantages of writing this information down, including the immediate and very real connection to your spending habits.
After a month of this practice, you will develop a sense of what you have been doing with your money during the course of a month. Separate purchases into common categories like groceries, housing, entertainment, eating out, debt payments, etc. Figure out how much you’ve spent in each category and total the amounts. (Pro tip: Keep separate categories for groceries and eating/drinking out.)
At the end of the month, ask: Did you spend more or less than you made that month? What spending habits do you see when you look at these categories and receipts? Does this reflect your values / Is this how you want to spend your money? In compiling this information, you’ve created a budget template, which means you have a rough idea about what you spend in a month and can project your future spending needs. More than that, once you know how you’re using your money, you’re in a position to make conscious changes about your spending habits.
Other tools that may help you track your money include cash envelopes (more on that in this blog post), keeping a consumer spending journal, or other forms of creative journal tracking. The trick is to find the approach that works for you. Keep that in mind as you begin. Try as many different ways of tracking your money as you can and see what actually works for you. There’s a solution out there for you. You just have to be willing to try a few options.
Budgets and spending plans succeed when they are flexible. You know this already, but life can be unpredictable. You’ll find items in your expenditures that you weren’t expecting. Don’t let this throw you off course. Those exceptions happen, and as you do this month after month, you’ll come to find that they happen nearly every month in one way or another. Maybe it’s a birthday party you were invited to attend, or perhaps your car needed a repair. As you become more proficient at budgeting, add a category for those surprise expenses. Every month can be “exceptional,” but that doesn’t mean you can’t be prepared for it.
A few final points... Be sure to budget a line for savings, including building an emergency fund. Building an emergency fund will keep an unexpected expense from turning into a disaster. And don’t forget to give yourself a set allowance for fun spending money that is not to be exceeded. Any budget plan with nothing set aside for fun is a plan for failure.
Make a plan, stick to it, and keep moving forward. You can do this!
(If you’re interested in seeing the startling amount of debt Canadians are starting to accumulate, the Government of Canada has a comprehensive and interesting article available here. Want to know what the Americans rack up? The Federal Reserve publishes quarterly statistics about it. If you would like a meaningful discussion of debt, NerdWallet offers an accessible analysis on household debt and what it means.)
If you have any questions, feel free to email Justus Joseph at Squirrel and Nest.
Asking for more money is an important part of your paid employment, but a lot of people balk at having the conversation. We don't talk openly about money, and asking for more can be intimidating to say the least. It is an important step in your financial health, though.
One of the largest barriers facing people is the struggle to quantify what they do and why they deserve a higher rate of pay. In today's Money Tools to Use series, we discuss how the S.T.A.R. Technique can help you express what you do and why you're a valuable employee.
To start, consider three contributions you made to your place of employment since your last review and/or raise. How did you continue to grow your level of service after those contributions?
Next, consider how you will continue to improve your work and contributions to the company going forward. In doing this you'll want to be as specific and concrete as possible, which is where the S.T.A.R. Technique can help:
S.T.A.R. stands for Situation, Task, Action, and Result. It's a technique used in informational and behavioural interviews to assess a candidate's past performance in order to get a sense of how they may respond to similar situations in the future.
The S.T.A.R. technique is as a way for employees to concretely show the skills they've developed and display the value they bring to their job role.
Here's an example from a person who is employed as a bookseller:
S: Situation – Customers could not find sections easily while browsing on their own.
T: Task – Create an environment where customers could browse with ease.
A: Action – Spearheaded design and construction of new section signs.
R: Result – Customers are now able to find the sections they want and the store has an updated look that’s consistent with its brand.
S.T.A.R. allows the bookseller to show a number of important skills -- we'll list two for each point, though there are many more in the above example. First, they noticed a situation in which a customer needed help (customer service, observation) . Second, they discovered what needed to be done to fix the situation (understanding, listening). Third, they undertook an innovative solution that required additional skills (brand knowledge and awareness, carpentry). Finally, they effectively solved the situation while improving the store's general appearance and efficiency (design, community connection).
When you ask for raise, if you know what you do and why it's important, you're going to have a strong foundation from which to build your case.
We'll discuss other ways to approach asking for a raise, considerations to think about before doing so, and further techniques to employ in future Money Tools to Use posts.
At Squirrel and Nest we are huge advocates for people paying for every purchase possible with cash, especially when people are first learning about their finances. The key to any stable spending plan is to two-fold: 1) know where your money goes, and 2) spend less than you make.
Notice we didn’t say, “Make a budget and stick to it!” All realistic spending plans need to be flexible because we’re people, and if there’s one thing we know about being people, it’s that life can and will be unpredictable where we’re concerned. That said, operating within your income is absolutely necessary to your financial wellbeing. That’s where cash envelopes come into play.
For many people, cash in hand is like butterflies: there one minute, gone the next, and who knows where it went. This often leads people to feel they are irresponsible or “bad” with cash, but what’s really going on here is a problem rooted in a lack of clear supports. Cash envelopes provide the support and framework needed to begin understanding where cash goes and why. Perhaps one of the simplest money tools you can use, a cash envelope is money you place in an envelope and track when you spend. When you’re getting started, aim for a modest goal: stick to a cash budget in one spending category for a week to increase your chances of success and give yourself room to learn. The idea of sticking to a budget for one week is reasonable, and this limited timeframe provides a good training ground to develop new spending habits and financial skills.
The Cash Envelope Method
Start with a single item from your spending plan that you’re familiar with and use consistently. For most people, this spending category is the food budget. Once you select your category, your goal is to stick to a cash envelope for that category for one week.
If, for example, you have a four-week month and a budget of up to $1000, you’d have up to $250 available for food each week. To begin, withdraw $250 from your account (never, ever, EVER take a cash advance out on your credit card -- if you do you will immediately begin to pay fees and a high interest rate, all of which costs you more money unnecessarily).
Take an envelope and write Week One: Food Budget on the front.
Write the total cash you have available for the week. Stick the cash inside, and viola! You’re set to go.
When you go grocery shopping for the week, you’ll be taking your cash envelope with you to pay for every food purchase you make. Be sure to keep your envelope in a safe place that’s accessible to you.
While you shop, try to keep a running total of the food you’re buying. This can be done via your brain, if you’re so inclined, by paper, or by using a calculator (most phones come with this feature now, but there’s nothing wrong with a Dollar Store calculator, either). In doing this, you’re developing a better understanding of what you’re about to spend, which connects you to the cash in your envelope and by extension your greater spending plan.
After you’ve collected your groceries, go to the register and ask the cashier if the store offers a cash discount (yes, do this; it’s particularly effective small, non-chain grocery stores -- the worst they can say is no and you’ll survive that). If they say yes, woo hoo! You’ve saved some money! (Seriously, though, ask for a cash discount for everything you buy every time you use cash).
Take your receipt. Take your receipt. Check that you received the correct change (yes, do this -- we're all people and people make mistakes and that’s okay).
Write the total you spent with the date on the front of the envelope and tuck the receipt inside your envelope.
Calculate your new running total for your budget.
When this works
By the end of the week you should be able to account for every bit of cash you spent down to the last penny. Hopefully you’ll even have a bit of money leftover. If you do have a bit of cash remaining, tuck it away for now, in case you need it to cover other parts of the month. At the end of the month, if that money is still around, toss it into an emergency fund, add it onto a debt payment, or put it into a savings account -- then pat yourself on the back because you rocked this! Continue to use cash envelopes through the end of the month. If it works well for you, consider how you can apply the cash envelopes to other spending categories.
Why does this work?
A few studies like “Researching the Pain of Paying” argue that we spend less when we use cash because we have a better understanding of what we’re giving away and having that psychological connection means parting with cash hurts. Other studies, like the much-cited study by Dunn & Bradstreet found that people who use cash spend less than when they spend with credit cards -- the findings stated that people spend 12-18% more when they use credit cards.
That could very well be a big part of the story, but it’s not all of it. So much of what we do, especially where money is concerned, comes back to habit. When you use the cash envelope technique, you’re actively trying to learn new spending patterns and money associations. Not only do you have to calculate your approximate total before going to the register, once there you have to confirm that you do, in fact, have enough cash for your purchase. With credit cards it’s so easy to plug in and go
-- and with many of the credit card machines, once you plug in the total disappears from the screen.
Even after you’re done with the immediate transaction, when you use cash envelopes you’re not done with your learning and engagement. You take the receipt, write down the total, and then calculate your remaining cash for the week. Every time you do this, you’re reinforcing a connection to your money and developing a better understanding of where your money is going. Knowing where your money is going and what you’re doing with it is a critical step in living debt free and financially independent.
What if this doesn’t work?
If you try this and don’t immediately meet with success, don’t despair! Learning new habits is never easy. It takes time, consistency, practice, and kindness. Be patient. When you make mistakes -- and we all do, even the most budget-conscious of us -- don't give up. Look at what happened, acknowledge what you did, make a plan for how you’d handle it differently in the future, and then keep going. Stick to it. It’s likely that you’ll discover you need to change habits that are deeply ingrained, or re-evaluate the choices you’ve been making with your money. For a lot of us, it’s all too easy to get caught up in the idea of having a particular lifestyle when we cannot, in fact, afford what it means.
Just remember: you’re reading this for a reason. You want to learn how to handle your money; you’re smart; you’re engaged; and you’re moving in the direction of financial freedom. You can do this.
Have you ever played Monopoly? My family banned the game from our house years ago; it seems to bring out the worst in all of us, and negotiations soon go from the usual trades to people issuing threats sugared with real -- not Monopoly -- money. I actually don’t think we ever finished a game, though my dad was a Monopoly champion in his youth. Whenever you add money to an equation, tempers rise, negotiations harden, and the fun tends to drain from each interaction.
This is why I started to laugh when my husband suggested we use Monopoly money to figure out our financial obligations years ago. Here's what that looked like:
For those of you who have had a bi-weekly paycheque, you’ll be familiar with the Three Paycheque Month. I don’t know about you, but I await this month with anticipation because it’s “extra” money for us to toss down on debt, put into savings, or (to some degree) spend frivolously.
Mint.com has given us an excellent tool with which to visualize our budget, but I’m still a hands-on, cash-based entity. Mint is limited in how much it can tell me because I work in different ways.
That’s one of the hardest parts of a budget: communication. Money is so often imbued with emotion that it’s difficult to take a logical stance and maintain that objectivity in conversations. “I want” and “I need” are hard to define and tricky to express in a way that supports continued discussion, whether you’re working through a budget with yourself, with a financial counsellor, or with a partner.
When it comes to a Three Paycheque Month getting priorities straight is important, especially when you’re tempted to stray from your regular path of responsible financing and go the route of excess and adventure.
We decided to have it all and opted for wants, needs, excess, and adventure…through Monopoly money.
Let the Game Begin!
My husband pulled out the Monopoly board we have in the house (it’s actually Monopoly City, as regular Monopoly is banned…the City version is a loophole we have yet to close). This board features money in denominations we don’t possess, with the smallest bill being “10K,” so we ignored the K and worked with our options. We counted out money equivalent to all of our paycheques for the month, both the ones we received and the ones we’re expecting (we also had Mint.com on our computer up at the same time), and put the money in a pile. From there we removed our regular bills: mortgage, debts, groceries, etc.
This left us with a much diminished pile, but thanks to Three Paycheque Month and a bit of overtime there was a significant amount left. Usually our money would all be gone at this point and the conversation would be over.
Let’s talk for a moment about excess and adventure. For a few months now we’ve been planning a trip to Disney World with family. We have a budget of $2600 for the entire trip, with all the park passes, dog sitting, hotels, transportation, etc. included. Was this a priority over repaying our suffocating debt?
In our case, yes.
Having the Monopoly money in hand and seeing how much we could pay off if we chose to spend that money on debt instead of gallivanting through Disney World made that decision more clear: the delay of debt freedom versus a family vacation. This isn’t a decision anyone could make for another person and comes down to what is more important to you—your values.
And let's face it: Disney's Always Been a Priority for Me
Values change, which is why conversations about budget is an ongoing, ever-changing dialogue. Budgets require constant check-ups, check-ins, revamps, and sometimes even Monopoly money. Whatever your system, giving yourself a means to articulate your needs is an essential, constant practice.
Right now, we value one family fun trip over debt repayment that would get us out of debt two months sooner. I honesty, I actually found a bit surprising considering my consuming obsession with paying debt and getting out from under our $45,000+ point Beast. In the long run, though, those memories are more important to us than the few months we could have shaved off our debt repayment, and having that money in hand helped crystalize that for us. Besides, we would still make our regular debt payments for the month and we would still be on track.
That's important: staying on track. We're not putting ourselves into a worse situation, which is key here.
Whatever your budgeting technique, try to have a few options for communication available to you when you discuss your finances. What follows is a list of ideas we’ve used and loved (or hated) at various times in our ongoing financial dialogue. Each of these items will be covered in more detail in future posts:
- A financial counsellor! Even the most avid budgeters and money-conscious people can learn a lot by having a professional financial planner look through their finances with a fresh pair of eyes and a new pair of ears
- List of every item you’d ever want to buy with prices
- Drawing and writing out immediate financial goals, medium-term ones, long-term ones
- Visualizing the life you want to live
- Making use of Monopoly money to have your monthly cash in hand (or using the cash itself if you can)
- Creating a visual debt beast (mine had hit points a la video game culture and is slowly dwindling with little opportunity to heal itself)
- Spreadsheets (Google free budget spreadsheet)
- Mint.com (athough it is really a bookkeeping system as it doesn’t allow you to budget for future months)
- Gold star chart for achievements (or smelly sticker chart…because who doesn’t love smelly stickers?)
- Maintain an updated list of goals with all items listed on it (both those involving money and those that are free)
- Create a budgeting group with a few of your close friends who can help keep you on track, provide support/ ideas, and celebrate your accomplishments with you
Squirrel and Nest offers one-on-one and small group financial counseling services that aim to give individuals the knowledge and independence they need to get their financial lives in great shape.