A while back I wrote about decreasing debt. We have a lot and it’d be nice to get rid of it. That isn’t our only financial goal, though. We also want to save some of our income. We think it is super important, not only for our near and distant futures, but in case of a financial emergency that could happen right now.
I also already wrote about the benefits of planning ahead financially. Now I’m going to tell you how we’re doing it now.
We’ve made it automatic.
Paying down our debt is made easier by setting up automatic payments for every loan we’re paying off. Swelling savings is made easier by the same concept.
We have three-ish savings piles, if you will. One is an emergency savings — an easily accessible $1,000 to be utilized in a (true) emergency. We built it up to that amount slowly and now we let it sit there. We don’t contribute to that pile and we won’t anymore unless we use it. If we use any or all of it, we will contribute what we can when we can until it is $1,000 again, ready for the next (true) emergency.
The other pile is what I’ve been calling our life savings, but I don’t think that’s a totally appropriate name. I think “catastrophe savings” is a more fitting name, but it was a bit too dooms-day-ish for me. We are working on building this pile up to be 3-6 months worth of our income so we can use it for day-to-day living expensing if we are ever in a situation where we are unable to work. This will give us a cushion to maintain our home and lifestyle until we are able to work again.
I say 3-6 months and not a definite number because we plan on ours to fluctuate between these two numbers. We want at least 3 months worth of income in our savings at any time. But once our contributions cause it to grow past 6 months, we will dump the “extra” 3 months into decreasing our debt (oh what a dent that will make!), and continue contributing. After our debt is all paid off, we will re-evaluate this plan.
Notice I also said “3-6 months worth of income” and “maintain our home and lifestyle“. I’m not talking about just covering living expenses. I’m talking about, in a catastrophe situation, keeping our house, continuing to pay down our debts, still eating healthily, keeping our cell phone and internet service, and continuing to save. Saving enough to maintain our lifestyle (granted it’s a minimalist, and affordable, lifestyle for us), instead of just enough to keep us off the streets, will give us a little extra cushion to stave off stress. And if we really needed to, we could make that money go further.
The other third-ish pile (I say “ish” because it’s actually spread around into a few other smaller piles) is our retirement savings (or “life savings” as I would like to be able to think of it). Through our employers, Andrew has a 401K and I have a defined contribution pension. Additionally, we each have a personal Roth IRA. Most of the money going toward our retirement savings is taken out and saved before we even see it in our paychecks.
All of our savings is calculated from what we feel comfortable affording and taken out automatically each month. Not seeing it enter the checkbook helps, too. When I went back to work after my second maternity leave (Pigpen learned to drink from a bottle just fine, by the way), I switched my direct deposit to go into our savings account instead of our checking. We had been living off of one income for a few months already anyway, so it made perfect sense to us to save that money for projects, catastrophes, or debts.
It took us a few years to figure out how much we could save monthly and how much should go to each purpose, but it’s automatically set now and on a roll. I feel comforted knowing it’s there and that we won’t have to worry or go into debt if we need to buy something, small or large.