In the first post of this two-part series, I wrote about the influence of Suze Orman’s The Money Book for the Young, Fabulous, and Broke in helping me build an emergency fund. After reading this book as well as Think & Grow Rich by Napoleon Hill, I took aggressive actions to increase my savings so that I could meet my eight month emergency fund goals.
As I wrote this post, I reached out to a few of my financially savvy peers who all have at least a twelve month emergency fund so that readers can have a diverse view point on creating the right foundation for your financial life.
- Get an Advisor/Mentor
A common theme emerged from the multiple interviews I conducted. Seek outside counsel. A few of my peers reached out to financial advisors to help with their financial plans, while others sought advice on how to reach their financial goals from mentors. One of my interviewees specifically said, “I try to listen more than I try to advise.” Why commit the same financial suicide as those that came before you? For example, one of the main investment tools that my mentor encouraged me to do was to own Real Estate. Not just to own a piece of property, but allow it to become passive income. So, with the guidance of my mentor I was able to purchase at a low cost, a REO (Real Estate Owned) property. Out of this passive income I was able to save up to 40% of my earnings.”
- Monitor your Large Expenses
One of the biggest expenses items in your budget is typically housing. I remember getting a lot of slack from my peers when I decided to rent out my home and rent a house in downtown Cincinnati with two friends. During this time I was able to reduce my housing expenses by half while leveraging the tax advantages of being a landlord. I’ve also heard of people renting out rooms in their home or their entire house with companies such as airbnb.com.
The second largest expense is typically transportation. I haven’t had a car payment in almost ten years. Upon graduation from college, I bought a 10-year old car for $3,500. That car “lived” for five great no-car payment years and when it was time purchase my next car I had enough liquid cash to buy the car with cash. Avoid car payments and reinvest the cash in paying down debts i.e. mortgage, unsecured loans i.e. credit card, and increasing your savings.
- Paying YOURSELF FIRST
Throughout the year there will be different opportunities where additional income, unexpected or expected, may present itself. For instance, income tax refund, bonuses, inheritance, and/or salary increases. In these instances, use the funds to help accelerate your emergency fund growth and pay down debt. Think of your savings plan as a way to pay yourself first and a requirement similar to a monthly bill used to help meet your goal of increasing your emergency fund. Adding yourself as a line item to your budget sends a message that
1. You are important enough to invest in yourself
2. If it’s in your budget month after month you can track how much of your money is going to you vs. things.