That’s a good question, don’t you think?
Now, I want you to check on your latest salary and then try to reflect, “Where did I spend my money?” Try to recall your expenses, bills, and your savings. Do they all sum up? Yes? No?
I am a newly government licensed financial advisor, and I discovered a lot of things that I wasn’t aware of before, like how to manage my own money, and how to do away from living a paycheck to paycheck lifestyle.
My first AHA-moment was when our trainer told us that ideally, we should have a 6-month contingency or savings. That contingency will serve as a buffer for emergency purposes and/or in case of unexpected job loss. At that moment, I was thinking “I didn’t know that and I don’t have that much contingency.”
According to Bankrate.com in June 2013, 76% of Americans were actually living from paycheck to paycheck. 50% of the respondents in their survey got less than 3 months worth of savings, and 27% of the respondents got no savings at all. Remember, this is a survey done in the U.S. and this may vary from country to country, however, the same financial issues exist.
Ideally, we all have to save at least 10% of our earnings. That means, if you have a monthly salary of $5000, $500 of it should go to savings, and $4500 should keep your liquidity (meaning you will have 90% for your expenses, bills, etc.). With proper discipline, this scheme will help you maintain a good cash flow and will help you avoid unnecessary loans or other financial liabilities.
So what will you do with the 10%?
The 10% is best kept in the bank, because if it’s kept in your pocket or wallet, then it will be gone in seconds. That’s for sure. There are companies paying out their employees directly through bank. Having a separate account for savings will definitely help and have that 10% go straight there. Most people would probably say they don’t have time to go to the bank (boy, that’s my #1 excuse), but hey! That’s where online banking comes in. You can link your payroll account and your savings account so you can do money transfer in a heartbeat. It’s pretty easy. If you’re not sure how to do it, you can definitely ask assistance from your bank.
I know saving 10% will not get you to 6-month contingency right away, but it’s definitely good to start somewhere. If you will, you can also save more than 10%, and saving more than that can lead you to higher financial buffer in case of emergency and get financial freedom faster.
Think of it this way, if you’ll save $500/month, it will give you $6000 annual savings. In 5 years, you will have that 6-month contingency. 5 years may seem a long time, that’s why the best time to start managing your salary and start saving for the future is now! The longer you wait or procrastinate, the farther you’ll get that amount of savings, or worst, you might not have that savings at all.
It’s your call.