Setup a basic emergency fund early

Setup a basic emergency fund early

Setup a basic emergency fund early

The emergency questions

When your car breaks down, what will you do? What will happen when your roof has a leak? Will you be laid off from work? What happens if your child becomes sick? Do you have the money to pay for each emergency? Will you have to borrow money from family and friends? Will you put the expenses on your credit card knowing you won’t be able to repay the balance when your statement arrives?

Answering these emergency questions is tough, you may not have an answer to these questions. Most people don’t have enough money in their bank accounts to pay for these things; they’ll have to beg and borrow and hopefully not steal. Try sleeping tonight knowing you don’t have a basic safety net for you and loved ones. Please try it, you won’t sleep well.

The first step

The first step to financial success is having an emergency fund. When life happens you’ll have the means to take care of it without getting into even more debt than you are already in. Having a safety net lets you sleep a whole lot easier; it provides security which is a nice warm feeling.

So how do you get started on building the emergency fund? Put $1,000 in a safe and easily accessible spot; whether it’s under your mattress, in a safe at home or a chequing account at the bank. As long as it is cash and you can get to it in case of an emergency. Having the money available to you at any time is important so that you are able to pay for the necessary expense when it happens, you don’t want to have to wait a few days to get your $1,000 out to pay for an emergency. Life happens fast and you want to be ready.

It’s time to sell

If you don’t have $1,000 it’s time to sell some stuff. Sell anything that is not needed like the extra car you have to drive on nice days only, toys, clothing, furniture if need be, there is no limit. Your $1,000 emergency fund is way more important than the sports car you drive around in the summer. At first it sounds crazy that selling something and living below the standard of luxury living is the way to go. Most people live above their means at a luxury level to keep up with the Jones. Don’t worry we all try to keep up with the Jones but remember the Jones are in debt way over their heads; they don’t own anything, the creditors do. So sell your stuff folks to get to your $1,000 emergency fund.

The emergency fund goal

If you have more than $1,000 to deposit into your emergency fund than by all means put more in. According to most experts you should have at least three to six months of savings however nine to twelve months would be more ideal. Three to six months passes by quicker than anyone will admit. Medical expenses and unemployment were cited in the annual BMO Rainy Day Survey as the largest emergency concerns Canadians had. These two concerns along may quickly surpass the six month mark. In the survey 60% of respondents stated they had increased stress levels when emergency occurs. Not only is this a negative to your health but to that of your marriage and children! Debt snowballs out of our control and affects far more than your financial life.

Next step

The expectation at this point is to have that $1,000 emergency fund. With spending most likely over budget socking away one year worth of expenses may break the bank. Right now focus on having $1,000. When life happens and you use your emergency fund the next step is to replenish it immediately because life continues to happen. For ways to save up to your emergency fund goals check out 37 Fast Easy Ways to Save Money Today!

Power of Belief

The secret ingredient: The Power of Belief

What makes up financial success

Knowledge, habits and confidence are the fundamental makeup of your financial success. First you need to have the basic fundamental understanding of money, debt, and how the financial world works. By understanding what you need to know, you can stay clear of any get rich quick gimmicks, tune out the noise of Wall Street and focus on reaching your goals. Once you have this knowledge, and it does not take long to do so, having the right habits enables you to get out of debt, save and build wealth all towards your goals. Through practice and achieving small financial successes at first, your confidence builds at each step, and your confidence will move you forward to larger steps towards your financial success. All this is achieved through the power of belief.

Life Altering Fundamental

There is one life altering fundamental missing from the above financial success principles and that is the power of belief. The power of belief comes in many forms; many people believe in a higher power in our world, others believe in raw power from the earth itself and others have a strong belief in their own abilities. The power is in believing in something regardless of what it is. Like you, I have goals to meet and dreams to live and I can attribute my current success to having believed in things greater than myself. My hope drive me through difficult times and propelled me to great ones.

Belief is like hope and without hope we cannot move forward, we cannot achieve our goals. We read stories of people altering their lives and what holds true in every one of those people is they believed in something greater than themselves. There are many others who use the power of belief.

Who uses the power of belief

The AA programs are life altering because they instill the power of belief of something greater than its members. This provides members hope and strength to overcome their addiction and change their lives for the better.

Sports teams across the world use the power of belief to grab victory in the jaws of defeat, pull off the world’s most unbelievable plays or outright dominate in winning championships years in a row.

Each of these powerful groups have the knowledge needed to find success, they spend countless hours changing bad habits into good ones and through small victories they win confidence. However, it is their belief in achieving success that propelled them to those moments.

How you can use the power of belief

  1. Write down what matters most to you in your life; define what success looks like to you in all aspects of your life: personal relationships, career, experiences you want to have and understand what type of financial health will be required to allow you to make it come true.
  2. Define what gives you hope. What gives you hope can vary in the different aspects of your life; is it the dream of having a family one day, to travel the world, to have the freedom to spend your time volunteering? After defining what gives you hope, find what is common in what gives you hope. In most cases it is the same thing and that is what you want to focus on each day.
  3. Find a place where you look every day, it could be your fridge, your bedroom mirror, somewhere very easily visible and post what gives you hope; it can be a picture, a handwritten note, whatever you find is pleasing to look at.
  4. Everyday look at what you determined gives you hope and remember it when you come across an obstacle you feel you cannot come across or an opportunity you have doubts that you can achieve.

Remember what gives you hope when making financial decisions. Understand that we are not perfect and we will not always be right in our decisions. However our belief fuels the combination of our knowledge, habits and confidence in achieving financial success, however you define it.

Bootstrap life

Bootstrap life like entrepreneurs bootstrap their business

Time to lace up and bootstrap life

It is time to bootstrap life like entrepreneurs bootstrap their business! We recently released an article on How to Bootstrap your Business which introduced the concept of ‘Bootstrapping’. As a refresher, bootstrapping is financing your business start-up with minimal capital funding. It could be considered a minimalist’s way of starting a new business. Bootstrapping is not simply just a tool to run your business; it is a mindset that builds behaviours that allows you to run your business on minimal capital. Now, is there a way to take the concept of bootstrapping your business, and applying that to bootstrapping your life? Absolutely!

Given that the average American has $4,717 of credit card debt wouldn’t you want to learn how to bootstrap your life? As an individual, how you can decrease debt, increasing savings, and increase your quality of life. And if that’s not enough incentive, a recent survey revealed that 69% of Americans have less than $1,000 in their savings accounts. By following this bootstrapping guide, we can get you saving money, eliminating debt, and increasing your quality of life!

How to bootstrap life: A step by step guide!

These are the essential tools to bootstrap life, and reach financial freedom.

  1. Understanding your net income

It is mission critical to understand your net income on a weekly and monthly basis. You need to know where you money is coming from and where it is going. Do you end up with money at the end of the month or do you have more month than money? (i.e. you are out of money with more of the month to live).

Lifestyle action

  1. Note your monthly after-tax income here: ___________
  2. Summarize your expenses in the categories below:
Spending Category Spent last month ($)
Housing (E)  
Saving (V)  
Investing (V)  
Utilities (E)  
Communications (V)  
Food (E)  
Transportation (E)  
Recreation (V)  
Debt (E)  
Clothing (V)  
Medical/Health/Gym (E)  
Personal (V)  
Cushion (EMERGENCY)  
TOTAL  
  1. Find your essential spending

The categories noted above with (E) are your essential spending; these are life’s necessities, like a roof over your head, a warm home, and food to live. The categories noted above with (V) are your variable spend; these are your nice to haves, and essentially not required.

Let us look at an example: Sam nets $3,230 per month (roughly $50k per year after-tax) and has the following essential spending:

Spending Category Monthly Spend ($)
After-tax Income (+) $3,230
Housing 1,050
Insurance (property/vehicle) 200
Transportation (car payment + fuel) 500
Communications 100
Food 300
Savings 625
Net of Above (variable spend)TOTAL $455

Note that what may be an essential spend to one person, may not be to another. In the case above, communications is essential to Sam – perhaps because of his job. The categories you break down your spending in may be different to someone else.

  1. How much variable spend do you have?

Your variable spend is the amount of money available after deducting your essential spend from your income. This is essentially your ‘free’ or ‘fun’ money for a given time frame. The level of your essential spending will dictate on how much variable spend you have. In most cases, your variable spend is where people enjoy life with meals, entertainment, clothes, vacations, etc. Based on the above example, Sam has variable spend of $455 per month, which is just over $100 a week to use on whatever he desires. Where I see most people who are not happy with their financial situation, is when their fixed costs are too high for their net income, thereby limiting their ability to have enough variable spend to enjoy life.

  1. Reallocate to your lifestyle and goals

Determine what is important to you and see where you need to make lifestyle changes. There are different ways you can split your fixed and variable as well, here are a few examples:

  1. If taking a large vacation each year is important to you, you could add a pot of savings to your fixed costs, thereby decreasing your variable spend.
  2. If going out to eat and having money for spontaneous vacations is your thing, you may need to downsize your home, who needs a large house anyway if you are never there!

By disciplining yourself to these portions of spend either based on a fixed amount, or percentage, you are can, very easily, bootstrap life. I can’t stress enough how important it is to track your spending, and ensure you are sticking to your allocated amounts. Now, keep in mind there are variable other factors that are going to affect your planning such as children, student loans, etc. However, you can help mitigate these factors by having a rainy day savings fund. Not everyone is going to have the exact same plan to their cash flow and spend, which is why you need to create yourself a unique savings plan.

Budgeting rules of Thumb

The starting point of your budget benchmark follows these allocations:

Spending Category Recommend percentage (%) of after-tax income
Housing 25
Saving 5
Investing 5
Utilities 5
Communications 5
Food 10
Transportation 10
Recreation 5
Debt 5
Clothing 5
Medical/Health/Gym 5
Personal 5
Cushion 10

Now let us look at another example, comparing how Sam and Kim spend their money to show the difference fixed-costs can make.

Spending Category Sam Kim
After-tax Income (+) $3,230 $3,230
Housing 1,050 850
Insurance (property/vehicle) 200 75
Transportation (car payment + fuel) 500 150
Communications 100 100
Food 300 300
Savings 625 625
Net of Above (variable spend)TOTAL $455 $1,130

Here’s how Kim has more variable spend

Sam:

  1. Owns a house financed by the bank
  2. Owns a vehicle financed by the bank

Kim:

  1. Rents which in this case is cheaper than owning
  2. Uses public transportation and saves on insurance

Based on the above, you can see how drastically your fixed spend affects your variable. Perhaps you use some of this variable spend to put into a vacation fund, or help pay down debt.

Remember, be frugal

The point of having the variable spend is not to spend every dollar because you have it. You need to still save more where possible, and eliminate debt in a timely manner. When we are we’re focused on saving – which in a personal sense can be considered ‘making profits’ this is a clear example of the transferability from a business to personal finances when it comes to bootstrapping. I have seen cases of people buying homes they cannot afford – and why – because it’s a nice to have, and not a need.

Your next three day action plan to bootstrap life

What you can do today

Summarize your monthly expenditures by category and understand your variable spend. Understand the percentage of spend per category based on your monthly income compared to the suggested allocation.

What you can do tomorrow

Set yourself a budget per month and start allocating funds to these buckets of spend. You may find it helpful to actually take out cash, and keep this on hand rather than using a card to pay for things.

What you can do the day after tomorrow

Track your spending daily, weekly, or whatever works for you. I recommend at least tracking on a bi-weekly basis so that you can catch yourself soon enough if you’ve gone over your spend so you can stop that behaviour before the month end.