How long could you last on $1,100?
A recent survey by the Yorkshire Building Society reported by the Daily Mail indicates 36% of British citizens could survive financially for only 11 days should a personal crisis occur such as losing a job or getting too ill to work.
Researchers examined income and expenditure patterns among British citizens and come to alarming conclusions. The survey indicates 36% of British citizens have less than 500 Pounds in savings to use as an emergency (Approx $1,100).
The current economic climate apparently leaves people with little choice regarding their financial conduct. More and more people are living on a “financial tightrope” as the Daily Mail puts it due to rising commodity levels and inflation and the growing impact of the current economic slowdown or recession.
The typical person, according to the survey, has 52 days before running out of financial resources. The average monthly expenditure of the average British citizen amounts to 1,445 pounds which are approx. $3,300.
Source: The Daily Mail
Many of the people surveyed indicated they will sell their home should a crisis occur. Relying on selling your home as a last resort is a very poor option as we’ve witnessed only recently. In a crisis real-estate prices tend to respond rather quickly plummeting down due to lack of demand.
In another recent survey by the ASEC Americans reported they saving habits and progress. According to the survey more than two-thirds (71%) report that they “have sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit.”
Good financial planning is about smoothing both consumption and living standards over one’s life
Solid financial planning aims to smooth consumption over a life time. As crisis come out of nowhere, annoyingly unannounced, good financial planning should utilize precautions to smooth out such a crisis as losing one’s job or becoming too ill to work. There are several tools which help smooth out such a crisis:
#1 Budget for the unexpected
Unexpected expenditures are a fact of life. Budgeting for these unforeseen expenditures each month is a great way of tackling them. Set aside 2%-3% of your entire budget for unexpected expenditures (aside from savings). This method has two distinct advantages: You won’t be surprised and hard pressed when you suddenly need a new car battery and more importantly should frequency and volume be surprisingly low you’ll be able to save that amount, increasing your emergency fund (step 2).The temptation to consume these funds is great. However, keep in mind that on average these expenses will occur eventually.
#2 Set up an Emergency Fund
Much has been said and written on emergency funds and their importance should be clear by now. It’s a method of expecting the unexpected and a very important pre-emptive measure towards more pressing times. Should nothing surprising happen you’ll have a healthy saving generating solid interest.
I believe an emergency fund should last for at least a couple of months of debt and mortgage payments as well as solid living. Everyone knows that decisions made under a lot of stress are usually bad decisions (I already addressed the faulty logic of selling your home as a last resort).Great articles on emergency funds can be found at The Digerati Life, The Simple Dollar and Get Rich Slowly.
#3 Get Insurance
Accidents, disability, mortality and longevity (surprising but true) all significantly or totally hinder our ability to maintain the level of comfort we have been used to. These events are unexpected in nature but have a certain probability of occurrence. Accidents and disability significantly change our lives, mortality is self-explaining and longevity has the risk of turning us into a liability on our children’s lives.
There is no real way to budget for these occurrences. What do we have left in our arsenal of pre-emptive measures? Insurance.
Insurance is basically transferring our specific risks to the community for a premium. For a certain premium which is carefully calculated according to the risk of a certain occurrence we can assure ourselves and our families a steady and good life even should the unfortunate happen. Disability Insurance, life insurance and retirement planning are all integral parts of planning for unexpected expenses in the “life” level.
All of the precautions and preemptive measures mentioned naturally cost money. That is what good financial planning is all about. Save when you’re able to finance possible hardships. Too many people live on a much higher level than they can actually afford. With an upcoming economic slowdown in Great Britain as well many people will unfortunately learn this lesson the hard way.
I believe its much easier compromising for 15% of your monthly income (that’s how much you need to put aside totally) than to face financial ruin.
- Budgeting for Unexpected Expenses
- The Problem of Accounting and Budgeting For Cash Expenses
- How to Save Money by Analyzing Your Budget: 4 Basic Tools
- How to Make Saving More Rewarding and Tangible: 5 Practical Tips
- How to Save by Making Credit Card Payments More Real and Tangible: 5 Practical Tips