I recently read a study from the Federal Reserve Board that was released in May that said in 2014, “Forty-seven percent of respondents say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money.”
That’s almost half the people surveyed that clearly didn’t have at least $400 tucked into an emergency savings account! I consider having an emergency savings with cash you can easily access a cornerstone to good financial planning. If you fall into this group that needs to grow an emergency savings quickly, then you might want to consider what I call Economic Shutdown. This is when you essentially cut out spending money on anything that is not an absolute necessity.
A few weeks ago we looked at the Geopp family’s Economic Shutdown, and at the end of one month they were able to save 35% of their take-home pay over and above their normal savings. That was money they were previously spending every month!
If you aren’t ready to commit to your own Economic Shutdown or maybe you have some money saved up but you realize it’s time to kick it up a notch, I would suggest using my TSL budgeting approach.
TSL stands for Taxes, Savings, Life, and it’s an actionable and easy-to-understand way for you to budget and build up your savings.
Essentially with this plan you will divide your gross income, meaning before anything is deducted, into 30% taxes, 20% savings and 50% life.
Let’s break it down.
Taxes: 30 percent
We all know that there are very few guarantees in life, and two of them are death and taxes. Before you start spending money, make sure you’re putting away enough money for Uncle Sam so you don’t get an unpleasant surprise come tax season. I suggest 30%, but if your family falls into a higher tax bracket it’ll likely cost you more, so budget accordingly. Remember all the taxes that you have to pay: Federal Tax, Social Security Tax and Medicare (FICA), state tax, property tax, etc.
Savings: 20 percent
This is where that study comes into play. When building your financial plan it’s important to create an emergency savings reserve. I recommend that people have enough cash in this account to pay for six months’ worth of your fixed expenses in the case of job loss or a catastrophic medical bill.
Twenty percent is a significant number, but if you’re not sure you can commit to this high percentage immediately, then commit to building towards it. Rome wasn’t built in a day, and your savings won’t be either. Also, remember that there are many tax-advantaged ways to save like in a 401(k), 403(b) or SEP IRA. Reducing your tax bill and creating your nest egg for a comfortable retirement sounds like a win-win to me.
Life: 50 percent
Smart budgeting doesn’t have to mean eating noodles out of Styrofoam cups every day, but it does mean spending within your means. Set your spending limit for food, shelter, transportation, insurance, kid-related costs, entertainment, etc. all at or below 50% of your gross income.
If you have the fortitude to accomplish T and S, then you can look at the next 50% you spend on everything else in Life as guilt free – because you’ve already tackled the mastered the two most difficult steps in TSL.
If you’re saying to yourself right now, “That’s just not possible. I’ve got bills to pay and 50% to live on won’t cut it!” then it’s more than likely time for you to try Economic Shutdown. Learn exactly what you consider a necessity versus a luxury. Do you really use all 2,689 channels that your premium cable package offers? Do you really need to eat out for lunch or dinner a dozen (or more) times a month? Cut the fat from your budget until you fit within that 50% spending range.
When almost 50 percent of Americans don’t have $400 cash to put towards an emergency expense, then it’s clearly time for us all to reevaluate our financial habits. My Economic Shutdown methodology helps people realize the difference between spending on a necessity or a luxury, and a TSL budget can help you keep that in check. If you need help with getting your TSL budget into place, create a free user account at YourWela.com to access financial tools and advice from my team.
Read the original article here.