According to recent studies, over 70% of Americans are simply not saving enough money – either for day-to-day needs and emergencies, or for retirement – and it’s a big problem! The Consumer Financial Protection Bureau (CFPB) now recommends that people save money in four specific “buckets” in order to ensure their financial security both now and later.
In this week’s blog, we’re going to talk about each of these buckets, and how you can help save for your family’s future without upending your life today.
1. Quarterly or Annual Expenses
Once you’ve reached a point where you’re comfortable paying your monthly expenses – your rent or mortgage, car payment, insurance, etc. – you may feel like you can take a breather. Then the holidays come around, or summer vacation, and all of a sudden you’re underwater again. What happened? In addition to your routine expenses that occur on a daily, weekly, or monthly basis, there are just certain times of year where you can expect to spend more.
Luckily, we’re talking about predictable expenses – the kids’ birthday presents or a family getaway – and it’s possible to account for these items. Take a look at your expenses for last year that fall into the annual or quarterly categories and create a fund specifically for these items. If you spend $1200 per year on all of these items, it’s easier to save an extra $100 per month than it is to come up with all that money at once.
2. Irregular Expenses
When it comes to irregular expenses, the hope is that they don’t come up very frequently; however, they are unavoidable for the most part. Major car repairs (or even a tune-up when you hit a certain amount of mileage) and new water heaters are simply inevitable. Unfortunately, they’re also hard to predict, in terms of both timing and cost. Having a bucket for irregular expenses can be a lifesaver when a big expense pops up seemingly out of the blue.
3. Emergency Fund
We’ve talked about emergency funds before, and they remain an extremely important bucket to contribute to and build up. After all, imagine that you and your spouse work for the same company and both get laid off at the same time! If you don’t have an emergency fund, you could be in big trouble.
The standard recommendation for building an emergency fund as a safety net is to save up between three and six months worth of expenses to keep yourself and your family afloat in case of a major, once-in-a-lifetime emergency. The best practice here is to set up a separate “untouchable” savings account that you automatically pay into every month. Treat your emergency fund like a bill that you simply have to pay.
4. Financial Goals
No matter what your important financial goals are at this stage in your life – retirement, graduate school, or starting a business – it’s important to save money toward achieving your dreams. Just like your other “buckets,” having your “dream” fund in a separate bucket will help you avoid dipping into those savings to cover unnecessary spending.
Once you’ve set aside money into each of your four buckets for the month, the remainder of your income should be able to cover your routine spending habits. If there’s a deficit, you may need to adjust the amount of money you’re spending on luxuries. Or if there’s not a lot of excess to trim, you may have to slow down your savings rate to keep your accounts in the black. Regardless, it’s important to start saving today in order to achieve your goals and protect your financial security for years to come.
