Aside from investment and retirement accounts, there are three regular savings accounts that can help you build more security and avoid taking on unplanned debt.
Even if you already have a regular savings account, you may wish to consider opening another one (or two). By preparing for both planned and unplanned expenses, you’ll simplify your finances and be less likely to resort to credit card spending.
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How to Avoid a Credit Calamity
A large, unplanned expense can derail the best financial intentions.
For example, our main sewer line broke and I had to come up with $7400 within 24 hours to dig up our front yard and the street to replace the entire line. Isn’t that a crappy surprise?
Think of the vacation we might have enjoyed with $7400…First class tickets on the Orient Express! A stay in a suite at the Paris Ritz Carlton! Chocolate mousse and Champagne every night!
Which leads me to my second troublesome debt scenario — paying for travel with a credit card. Ten years ago I paid for a trip to France to attend a wedding, and put the entire vacation on my credit card. The trip was lovely, but then I was saddled for debt and interest for years after.
#1 – Open an Emergency Savings Account
The one certainty, for each of us, is that unplanned things will happen that cost money. We want to do extraordinary things with our money and live debt free, but to support those goals we each need an emergency savings account. Otherwise we’ll be scrambling, and risk losing the momentum we’ve worked so hard to build.
How much do you need to set aside? That will vary depending on your situation. Dave Ramsey recommends first establishing a $100 emergency account, and then building it to $1000. My health insurance annual deductible is $1650, so I need to account for that, too. Suze Orman recommends setting aside six months of income so that you can withstand a job loss, and that makes sense, too.
The important thing is to start now.
#2 – Open a Freedom Savings Account
Our Freedom Account is where I stash a set amount of money each month for once-a-year expenses like insurance, taxes and HOA fees.
One tip – if you have large annual expenses, explore whether your vendor offers the option to pay monthly. My insurance company just started offering this service for the premiums on my term life insurance policy, so now I have a small amount automatically deducted each month and no longer have a bigger annual bill.
#3 – Open a Vacation Savings Account
Once you take this step, I think you’ll love having a dedicated vacation account. I began funding ours with $50 a month. What it meant was that when Southwest advertised airline tickets for $79, the money was already there and we could pounce on the deal. We saved about 10% by prepaying for our hotel and rental car from the Vacation Account, too. Then all I had to budget for was daily expenses. The result was zero credit card debt after our last trip.
Make Savings Automatic
When I worked for the publishing company, I arranged to have a set amount withdrawn from each paycheck and sent directly to a savings account. If your company offers this benefit, I highly recommend it as a painless way to build real wealth. If it seems impossible, start with a small amount. You’ll love seeing that balance grow, and with time you’ll be able to increase the amount.
I started having just $25 withdrawn from each bimonthly paycheck, which added up to $600 a year. I eventually eased that up to $50 a paycheck after my next raise, and then $100, until eventually I was having $200 a check sent to my savings account — which added up to a nice $4800 a year. The funny thing is, I really didn’t miss the money — as long as it didn’t have a chance to pass through my fingers.
Now that I’m self-employed, I budget for savings each month and pay the amount just like a bill.
How About You?
If you have other systems for saving and managing unplanned expenses, drop a comment below! We’d all LOVE to hear your strategies and thoughts.