Don’t build sandcastles next to an ocean
Have you ever observed a young child building a sandcastle?
Watching them work diligently, with their little fingers, digging up clumps of sand and placing it atop their newly created masterpiece. Then once they determine their structure is big enough, they smooth out the sides, shaping their pile of sand into a small fortress.
Now imagine how that child will feel if a huge wave comes rolling in, flattening their castle. What took nearly a half-hour to create is reduced to rubble within seconds.
If only they knew how close to the water they were, their castle would still be standing.
Don’t create a budget without a plan to protect it
Sadly, if you’re not careful, your budget could easily be washed away too.
After tracking expenses for a month, you may feel no stone was left unturned. Again, the purpose of tracking your spending habits is to figure out where all your money is going. Tracking your expenses will help you identify areas where you can make adjustments to better suit your financial situation.
There is one other thing you need to do before saving for the future; built an emergency fund.
So what is an emergency fund and why do you need one? An emergency fund is for those unexpected expenses you cannot predict such as car repairs, broken water heater, new roof, or medical expenses. It’s these types of expenses which could quickly unravel your budget.
Just like the child building their sandcastle, they had plenty of sand to keep making it bigger and better. Yet, within seconds, a disaster came along and forced them to start over. However, the reality is, after spending so much time building then having their structure destroyed, that child will most likely just give up.
Same holds true for adults with budgets. Just when you think you have it all figured out and everything’s going according to plan, one of those unexpected financial burdens happen, completely throwing off your budget. Therefore, an emergency fund is a bulk of money you save and put aside to handle those unfortunate, unpredictable situations.
The amount you save is really up to you to determine. Many financial experts will suggest at least $1,000.
Options once your emergency fund is established
Once your emergency fund is established you have a couple options to consider.
You could start putting money in a savings account for big purchases, nice vacations or remodeling projects around the house. Or, you could establish separate funds for those expenses which only come every six months or once a year, such as car registration, life insurance payments, back-to-school shopping, and the Christmas holiday season.
Again, it’s up to you how you use your emergency fund. You just have to remember, what you take out of your emergency fund will need to be replaced.
In summary, after you establish your budget and track all your monthly expenses, the next step is to protect your budget with an emergency fund. Without an emergency fund, you could put yourself back in debt and completely destroy the budget you worked countless hours putting together. An emergency fund is a blockade between unexpected high expenses and your established budget.