Reduce Financial Emergencies With One Simple Strategy
Do you ever feel like you’re on a treacherous road with falling rocks wrecking all kinds of havoc on your life? We all feel like that from time-to-time especially when it comes to money. But you can reduce financial emergencies with one simple strategy.
Image Credit: ©Ree Klein, All Rights Reserved
Most of the financial “rocks” that seem to fall out of nowhere actually are dangers (costs) we can anticipate. But for some reason we think we’ll magically have the money to handle the expense later. As I discovered, and perhaps you have, too, being unprepared nearly always puts you farther behind financially and often means more debt.
So how did I solve this problem? I finally took the advice of my mentor who had urged me over the years to set aside money from each paycheck to cover various future expenses when they showed up. My mentor called these types of expenses future capital expenses (FCEs). Once I adopted this practice, my life improved dramatically.
Here’s how it works…
1. Create a List of Future Capital Expenses.
Your Future Capital Expense list will likely include several categories. Everyone’s list will be different depending on whether you’re single or not, have children, own a home or rent, like to travel, have a car or not, etc.
- Bills that don’t come due each month. These are for things like school tuition and books, auto and homeowner’s insurance, property taxes, etc.
- Things you know will break…like your car.
- Things you know you’ll have to replace…there’s that car again.
- Home repair. At some point the roof needs to be replaced or the house must be tented for termites.
- A Down payment on a home if you have a desire to be a homeowner.
- Gifts…those gift-giving holidays and birthdays are not emergencies, they show up like clockwork every year!
2. Determine the Annual Amount For Each FCE.
Next to each entry on your list, figure out the annual amount you need/want to save to ensure the money will be there when that bill comes due or it’s time for vacation.
For bigger expenses, like to replace a car, decide how many years before you’ll need to replace the car and how much a new/used one will cost. Divide the estimated cost by the number of years to get your annual amount.
3. Determine How Much to Save Each Payday.
Divide the number of paychecks you receive each year into the annual amount for each entry. That’s the amount you need to save every payday. DON’T FREAK OUT! I have a vivid memory of the first time I did this exercise. I was disheartened and told my mentor that there was no possible way I could save that much out of each paycheck and still be able to pay my regular bills and eat.
Take a breath and then go back and revise your list. Here are some things to consider:
- Reduce some amounts where possible. While you may not be able to reduce your property taxes, you can adjust things like goals for vacation. If you put $25,000 for a car replacement figure, start smaller with a goal to save $5,000 or $10,000 over a longer period of time. That’s more than you would have saved and will put you in a better position.
- Eliminate some categories if possible. Vacations are great, but maybe you can take a year off and stay local. Gifts can hog up a huge chunk of cash; what can you do to reduce that category?
At the beginning of 2002 my my FCE list looked like this…
I remember thinking that this would be impossible to do…but I was wrong. It was very possible. I have since expanded my FCE account to include 16 categories. I always have the money I need and I sleep well because I’m not worrying about when the next rock will fall on my head.
4. Set up an Account to Hold Your FCE Funds
To be successful, don’t mingle your FCE funds with any other money. Here’s the best approach:
- Set up an account specifically for your FCE savings.
- Automate the deposits. The easiest way is to have your employer split your direct deposit so the allotted FCE amount goes directly into the FCE savings account.
- Don’t rob the account! Remember, it’s that guy in the mirror who can be your worst enemy. Don’t let some shiney object catch your eye and derail you from your path to Prosperity!
5. Track The Deposits/Withdrawals By Category.
I use an Excel spreadsheet to track the balance of each category in my FCE account. I put the categories across the top and enter transaction dates down the side. This allows you to always know where you’re at in each category. I made a free template of my current FCE tracking worksheet as an example. You can modify it for your use if you’d like to do something similar.
- Future Capital Expense Tracking Worksheet (Excel-prints on legal size paper)
- Future Capital Expense Tracking Worksheet (PDF-prints on legal size paper)
The most important thing is to start some system to ensure you have the money you need when the bill arrives. The bill will always arrive! Even if you don’t use this system, use something. Start somewhere. Start small. Just start. I promise, you’ll be glad you did.
What About You?
Are you willing to give this a try? Do you already do something similar? Please share your story in the Comments, we’d love to hear from you.
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