What Is A Financial Security Net? Not Merely Your Saving Account
Savings are very important to establish financial security. Remember in my last post how I explained that almost everyone faces some form of income hardship? Instead of savings, I like to call this a financial security net. This is meant to ease your financial fall when income hardships happen. Calling it savings would be a little broad, and I will mention other ways to save your money in the future.
How much money should you put aside for a financial security net? Anywhere from 3 – 6 months of expenses. Ultimately, the idea of a financial security net is to ensure that you can still pay your bills while you are out of a job temporarily.
Unfortunately, 78% of Americans live paycheck to paycheck and can hardly make ends meet. Even worse, when the paycheck does not provide their financial needs, a good chunk go into debt. Today, I want everyone reading to no longer depend on debt alone when hardships come up. Your financial security net, while it will not make you rich, it will be your first step to becoming rich.
Where Should Your Financial Security Net Go?
I personally recommend that the money for your financial security net should be in the bank. Should it be on your cards’ accounts? No! Instead, the money should be in a place where you cannot immediately spend it. The money should go into a savings account, if you do not have one, do everything within your power to make one as soon as possible.
The reason for a savings account is because it houses money you do not regularly check on. Since this account is out of mind, you personally do not see it as money you can spend regularly. Furthermore, labeling the account as “savings” or even as “emergency savings” will make you detest the idea of pulling any money from it, except for emergencies. However, even with the savings account separate from the accounts you normally pull money from, the savings account should still be easily accessible. Your emergency savings should not be in any account or asset that is not liquid, meaning you can pull hard money from it at anytime.
Health Benefits Of Having A Financial Security Net
Wait, there are health benefits to having a financial security net? I believe I mentioned this is your first step to becoming rich, the effects after having a savings account will help you to further financial security. Research shows that having savings put aside for the future raises happiness, which can prevent depression and anxiety.
There are other health benefits to saving money. Some studies suggest that saving money reduces physical ailments like heart burn. Some even suggest that you will have a more healthful weight, but that may be from purchasing more healthful food and eating out less since eating out more tends to be more expensive.
Savings: Start It Up, It Will Grow
A financial security net is never made instantly. On the contrary, you will have to deposit money into it in chunks. I recommend the “pay yourself” first method, which is where to set aside money for your own financial future. Take the money you’ve earned and label it as a specific type of money. By labeling that money, you treat it as you’ve named it, so money you call “my saving money” is far less likely to be spent lightly.
This does take discipline. But if you have no savings, start with a considerable amount of money you have earned. I recommend at least 10%, but go as high as you can. I can understand situations where that is not possible, but start either way. Even starting at a very small amount, like 10 dollars, is significant enough to cause a snowball effect on your savings. Much like anything worth doing, the results are not instant. Keep a savings mentality and you can have a financial security net that will ensure you financial future by minimizing sudden setbacks.
Change Your Instincts
Keep in mind, most Americans have insufficient savings. Even 10% of people with a six figure salary have next to no savings (remember income has next to nothing to do with wealth). This is not always because people do not make a financial security net, but because they do not keep it up. Even small regular deposits into your account will start your financial build against the grain of normal Americans and help build wealth. This is painful, because humans are innately supposed to gratify their needs, we have not evolved our brains to psychologically reward us to plan for the future.
Planning your financial future is, in a way, transcending your psychological needs. And it is painful, much like the first annealing of metal at a forge. While painful, these sacrifices are worth it. In my next post I will mention some further sacrifices that will help you with your savings. But for now, establishing a financial security net is a great first step setting up your financial success. And it is a very productive way to spend your time until my next post to forge your wealth.