Five Things That Will Change Your Financial Life Forever
by China Brooks
1. Emergency Fund
An Emergency Fund is the brain child of Dave Ramsey (Financial Peace Boot Camp). It's a savings account containing a minimum of $1,000, acting as a cushion in case an unexpected cost arises. Have you ever needed emergency car repairs that you couldn't afford? Has your pet ever needed a visit to the vet that you didn't have money for? Have you ever been in a car accident and had trouble paying the car insurance deductible? Having an emergency fund saves you all this trouble and keeps you from going into debt (using a credit card).
In 2009, I was in 3 car accidents; two were not my fault, the third one was. The first time, my car was parked and someone hit it at night, leaving no note. $500 deductible. The second time, a young kid busted a u-turn right into me. $500 deductible. The third time I scraped this old man's car. $500 deductible. That's $1,500 in one year. Back in the day I would have freaked out. I might have taken out a loan and gone into debt, but instead I had my emergency fund. I was okay. (p.s. It's now 2017 and I haven't been in an accident or had a ticket since - knock on giant redwood forests).
2. Living Expense Fund
This fund is six months to one year of your living expenses saved up. I always save enough money to have a comfortable six months. I especially need this because I do not have a typical nine-to-five job. Basically, I play Russian Roulette with my income sources, which I like because it keeps me from getting bored. It also puts more pressure on me to be financially organized and plan ahead. A living expense fund will save your ass if you get fired, need to quit, get sick, have a family emergency, want to travel, etc.
3. Periodic Expense Fund
The Periodic Expense Fund is for things such as car registration, a once a year AAA bill, dentist visits, passport renewal (every ten years), etc. I pay my car insurance bill from this fund (six months to a year in advance), which saves money. Sit down and ask yourself, “How much money do I really need to live for a year?” A fully-funded periodic expense fund is ideal, but the emergency fund and the living expense funds are the most important corner stones.
4. Setting Up Savings Accounts
Set up a minimum of three savings accounts for your emergency fund, your living expense fund, and your periodic expense account. Set up additional savings accounts for large periodic expenses such as travel, property taxes, rental income money, union dues, etc. One year I could not pay my property taxes ($4,800), or my SAG dues (1.25% of my yearly earnings). That was the same year I made $100,000 in two months, which doesn't make any sense, right? I haven't had that issue since I organized my finances. It's not the amount of money you make, it's what you do with it.
5. Pay Off Your Debt
Pay off your debt and live debt free - paying off debts with highest interest first. Attack credit cards, car loans, student loans, and then the mortgage ('mort' means death in French, by the way). The great thing about debt is that once it's paid off, you never have to get into it again! Trust me that you will feel so much better without that monkey on your back!
These five steps guarantee that you don't ever have to go into debt to pay any of your bills, and it gives you peace of mind. In 2008, I saved enough money for seven months of living expenses (I lived by myself), which included moving twice and those three unexpected car accidents. I also paid off my car, and I paid for my new business (no business loan). I paid my SAG dues, property taxes, and car insurance bills in full.