Debt-Free Forever (18 page)

• “I don’t make enough to save anything.”
  
• “I’ve got a lot of debt and I need to get that paid off first.”
  
• “I’m too young to worry about retirement now.”
  
• “What’s the point? The economy is in the trash and my money won’t be worth anything.”
  
• “You have to live for today, man.”
  

Maybe the problem is that the Law of Inertia is working against you. The Law of Inertia says that a body at rest will remain at rest until some force acts upon it. A lot of the problems people have dealing with life, their money, everything, stem from this simple law. It is so much easier to maintain the status quo than to change. Fact is, you cannot save $10,000 until you save $1,000. You cannot save $1,000 until you save $100. You cannot save $100 until you save $10.

The best way to start saving is to create an automatic
deduction of a specific amount of money every month from your regular account to the savings vehicle you’ve chosen: RRSP, RESP, or TFSA. It’s all very well to think about it, plan to do it, ponder on the benefits you’ll derive, but if you don’t actually set up the auto deduction, you’re just spinning your wheels.

GAIL’S TIPS

Getting from where you are now to where you want to be requires that you do something differently. If you want to stop spending money you haven’t yet earned, you must stop carrying your credit cards. If you want to make sure your family isn’t tossed to the wolves if you die, you buy insurance. If you want to have something in the future, you don’t spend that money now; you save it for when you’ll need it. You must change what you are doing or not doing to something that works
for
you instead of
against
you.

Change is exciting. Change brings challenge, learning, and a sense of New. Change is full of promise. Change is audacious.
It takes guts to change. It takes real guts. And guts are something that seem to be in short supply these days. If you have them, you’ll make it. If you don’t, well, so sorry. No guts, no glory.

So the question you have to ask yourself today is this: do I have the guts to change?

If the answer is “Yes,” then what are you going to change—
today?
What small step will you take to move you from being at rest to being in motion? What will you do (not think about, not plan, not worry about, not whine about) to change what your life looks like? What will you DO?

Saving isn’t a “nice to do,” and we have to stop treating it that way. Saving is a
must do.
Having money at hand is what gives us the flexibility to cope with the crap that inevitably comes up in life. Money gives us options. No money … no options … sad life.

C
rap happens. That’s life. If you don’t have some money set aside to deal with the poop the Fates throw at you, you’re in for a tough haul. I routinely meet folks who do not have a stash of cash at the ready just in case the unimaginable becomes all too real simply because they never thought it could happen to them. And I hear from hundreds more: sad souls who have hit a wall and have no money to help them over the hump. I’m not sure just what I have to say to influence
you
to get this very important part of your financial safety net in order other than this: if you have some money available to help you through whatever life throws at you, things will be a lot less stressful than if you’re dealing with caca and no money at the same time. Having money in the bank means you have options.

It doesn’t really matter how well you think things are going. Like the economy, life is a cycle. Sometimes you’re on your way up the positive side. Sometimes you’re on your way down the
negative side. That’s just the way life is. And it really shouldn’t come as any surprise at all since it has always been thus.

Building up an emergency fund is an important part of your risk management. But you already know that. You’ve no doubt heard that it’s a good idea to have between three and six months’ income set aside. With the recent crisis, some financial pundits have raised the bar, suggesting you may need as much as eight or nine months’ worth of income since a down economy means a longer recovery period. Most people are overwhelmed when they think about gathering up that amount of money. Don’t worry, I’m going to show you how in small steps anyone can manage.

I get two big push-backs when I talk about an emergency fund with people. The first is, “How am I ever going to save six months’ worth of my income? That’s frickin’ impossible.” The second is, “You mean I should leave half a year’s income in a savings account earning a pittance in return? You’re nuts!”

The answer to the first question is, “One dollar at a time.” The answer to the second question is, “Yes.”

Establishing an emergency fund isn’t an easy thing to do, particularly if you’re living pay to pay and trying to get rid of a crapload of debt. But the alternative sucks even more since the first time the caca hits the fan, any progress you’ve made with your financial foundation will be wiped out. Talk about demotivating. If you or your partner lost your job, or if one of you became ill and couldn’t work, would you be able to pay your bills on one income? If not, you need an emergency fund. If
you’re the sole provider for a family, a single parent, or a dude or dame on his or her own, all that stands between you and a warm open grate on Main Street is your emergency fund.

The rule of thumb for finding a new job is that it takes about six months. In a crappy economic environment, you can probably double that. And heaven forbid you should get sick because on top of no income you’d also have all the costs associated with getting treatment. I’ve heard from more than a few people who, having been diagnosed with something fixable, are buried in debt by the time they’re back to work.

GAIL’S TIPS

If the amount you need to save seems too daunting to even think about, I recommend you figure out what your essential expenses are and cover your butt on those one at a time. Your essential expenses are those things that keep body and soul
together: rent or mortgage payments and taxes, car payments unless you’re prepared to part with your car, minimum payments on debt, food, basic medical costs, and perhaps child care if giving up your spot means you’ll never get it back. By knowing what your most basic needs are, you know the minimum amount you need to get by. Then you can get busy accumulating the money you may need to cover those costs.

If you are a two-income family, begin by setting aside the amount it would take to stay on an even keel if the higher income went away. So if the lower income would cover 40% of your essential expenses, at the very least you need to save up the other 60%, while you pray that you don’t both lose your jobs at the same time. If there is any likelihood that you may both become unemployed at the same time for whatever reason—you both work for the same company or in the same industry, you both have unstable jobs, you both have had bad performance reviews—your buffer must be bigger.

GAIL’S TIPS

To create your emergency fund, set up an automatic deduction from your regular account to a high-interest savings account. Don’t settle for some pathetic savings account being touted as an “investment account” from your local bank. You work hard for your money, and your money should work just as hard for you. As for keeping your emergency funds liquid, you must. If you need money, that’s not the time to discover that the markets are down and half your emergency fund has evaporated. In the case of an emergency fund, safety is everything.

The Tax Free Savings Account (TFSA) is perfect for emergency funds. Isn’t it nice when a new product comes along that is the Bestest Idea Ever? The TFSA is just such a dream come true, and it’s a perfect vehicle for saving up money to cover your essential emergency expenses.

The TFSA is available to Canadian residents 18 and older and can be used to save up to $5,000 every year. You can have as many TFSAs as you wish, but the $5,000 contribution limit applies across all accounts. While the contributions aren’t tax deductible, all the income earned in a TFSA is tax-free.

GAIL’S TIPS

If you can’t save $5,000 this year, don’t sweat it. Your contribution room can be carried forward to future years. So if you can only come up with $2,000 this year, next year your limit will be $8,000 ($5,000 for next year and $3,000 carried forward from this year). And since those limits are going to be indexed to inflation in $500 increments, watch for increases in limits over time.

The bestest thing about the TFSA is its flexibility. You can take money out of your TFSA at any time for any purpose without losing the contribution room permanently. If you do withdraw money from your TFSA, you’ll be able to put that money back the following year—yes, you’ll have to wait until then—without affecting that year’s $5,000 contribution limit. That flexibility makes the TFSA the number-one choice for socking away an emergency fund.

If you don’t have much to save, it doesn’t matter—the important thing is just to start. Even if it’s only $20 per pay, start. Aim to have $500 in the bank. Then aim for $1,000. As long as you haven’t started, you’re at risk. Once you’ve started, you’re on your way and then it only becomes a matter of how to boost the amount you’re setting aside.

If you’re spending $8 a day on lunch at work, and another $5 on coffee, that’s $13 a day. Brown-bagging it can save you $10 a day, which is a whopping $2,400 a year for your emergency fund. Go over your budget and look for other places to cut back. Aim to contribute at least $100 a month to your emergency fund. Every six months, find another $10 a month for your emergency fund. Now you’re on your way to financial stability.

Once you’ve started your emergency fund, sticking away your $20, $50, or $100 a pay, you’re on your way. But you can’t pat yourself on the back just yet. Since my rule of thumb is that you need at least six months’ essential emergency expenses set aside, you must find a way to boost your savings to reach your goal in a reasonable period of time.

One of the best ways to establish an emergency fund is with a payroll deduction at work. This is particularly true for all of you people who have no discipline! Employers often offer the option of deducting some money from each of your pays and
putting that money in a savings pool of some sort, perhaps a government bond. There. You won’t even miss it since the money never hits your bank account.

GAIL’S TIPS>

Another way to build up a fund is to reduce what you’re spending in one category of your budget and send that money to your high-interest savings account. Most people have things they can cut back on. Do you buy coffee every day on the way to work? Do you smoke? Do you pick up the latest magazine at the checkout counter? Do you subscribe to premium cable? Do you go out for a drink with your friends after work? Buy your lunch at work? Pick up your favorite Stuff whenever it’s on sale even though you already have 30 pairs of shoes, white shirts, handbags, DVDs … name your vice here.