Recently, I had a long conversation with an old friend of mine whose opinions and ideas I value greatly.
He asked me what personal finance mistake I see people asking me about the most often on The Simple Dollar and, after a bit of thought, I told him that the most frequent mistake I see is that people are constantly blindsided by unexpected events. They plan for their lives to go incredibly smoothly, but when something disrupts that smoothness, they’re often in panic mode. Even small things, like a car repair issue, can upset all of their plans and send them back into debt.
“Well, how do you solve that?” he asked.
The answer is fairly straightforward. Have a nice cash emergency fund in place. Make sure you have the insurance that you need – life insurance and so on. Keep working on your skills, particularly ones that transfer well from job to job.
When you don’t do these things, the unexpected events in our lives catch us blindsided and unprepared.
He thought for a bit and then said something quite thought-provoking. “Most people spend an awful lot of their time running around putting out fires in their life. Your argument is that a bit of time spent now to prevent those fires ends up saving a ton of time and money over the long run.”
Bingo. Most of the unexpected expense in adult life comes from running to the fire, not putting the fire out.
We know that eventually our car is going to break down. We know that there’s always a chance that we could lose our jobs. We know that our appliances are going to fail in our home sometime in the next few years.
Yet many of us never think about it. Instead, we enjoy our lives under the assumption that these bad things will never happen.
And when they do, they hit like an atom bomb. We start living off of credit cards, racking up debt like there’s no tomorrow. We finance the repairs and find ourselves giving more money in interest than we give for the actual purchase. We waste time shuffling our money around, robbing Peter to pay Paul.
It’s stressful. It’s time consuming. It’s a guaranteed waste of money. And sometimes it catches up to you and bites you hard.
What’s the alternative? Spending less than you earn – even if only by a little bit – and simply socking away the rest. The exact method of “socking it away” can be argued and analyzed until the cow comes home, but the person putting $5 a week into a 0.5% savings account will always beat the person saving nothing at all.
Many people push back against this because they’re already spending everything they bring in and they simply feel there’s no room for such savings and planning.
Here’s a very simple solution for all of you who are finding that you’re putting out way too many fires each day.
Find five simple things to change in your life. Maybe you can skip a morning coffee two days a week. Maybe you can install a programmable thermostat in your home. Maybe you can start a carpool. Maybe you can cook at home one more night a week. Maybe you can switch to a generic product from the name brand.
Find five little routine things to change in your life. Just little things – nothing big or life altering.
Once you’ve switched, figure out how much each of these things is saving you per week. The coffee routine change saves you $5 a week. The meal at home saves your family $12 a week. The generic product saves about $1 a week. The programmable thermostat saves about $11 a week.
Total those amounts up. Then open an online savings account and set up a weekly automatic withdrawal for that total amount. Maybe it’s $100. Maybe it’s $11. Whatever it is, have that much transferred out of your checking account each week. Then forget about it. After all, that money is already accounted for.
When the next crisis that you can’t possibly solve comes along, check that account. Suddenly, instead of panicking and running around trying to put out the fire, you find that the fire is already taken care of. A few mouse clicks and the bill is paid.
Today’s the day to stop putting out fires and start preventing them.