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Financial Literacy - Emergency fund
SPOTLIGHT
Jean Chatzky
Take baby steps to build a sizable emergency fund, says this personal finance expert.
Creating an emergency fund

Interview: Jean Chatzky


Balance spending and income
How can people control their spending enough to put money away for an emergency fund?

Make financial goals tangible

Well, the first thing to do is to put away the money. You stash it away out of your path. I mean, look at how people manage money these days. Most people don't balance their checkbooks. Instead, they go to the ATM and they take a look at the balance on the slip and they know that's how much they've got to work with. But what you're essentially doing is just minimizing the balance on the slip a little bit. You're not going to see as big a number and so you won't feel like you have as much wiggle room. Then, when you walk into a Banana Republic, you probably won't buy that T-shirt. There are some great budgeting tools on the Internet. I like the ones at practicalmoneyskills.com, which is actually Visa's nonbranded site.

You can pay your bills as they come in rather than all at once. This is a trick that came out of the research that I did for my book, which is called "The Ten Commandments of Financial Happiness." Essentially what it showed was that people who pay their bills as they come in, rather than sort of saving them up in a stack to pay once or twice a month, have more in savings. This study also confirmed that those people are less in debt and much happier. I believe the reason behind this is that paying your bills as they come in allows you to do a little bit of mental tap dancing through the month. For example, if you get a bill for heating or air conditioning that is higher than you expected it would be, you're going to automatically compensate in the same way that you would when you saw that smaller balance on the statement from the ATM. This means spending less on other things, and at the end of the month you'll find that you have fewer financial problems.

Pay your bills as they come in.

The other thing that I think really helps is a little bit of basic goal-setting. When someone says, "Oh, I want an emergency cushion; oh, I want a retirement fund; oh, I want to start saving for college," those are very intangible goals. They're intangible until you start putting some numbers with them. So figure out what it means to have that three months of basic living expenses and then break that goal down into workable steps. OK, you know if I have decided that I need $5,000, well, if I put aside $100 a week for a whole year, I'm going to have it. Done. $100 a week -- that's a number that we can understand. That's a number we can wrap our brains around as opposed to, "I need to save $5,000" or the even more vague, "I need an emergency fund."

-- Posted: July 23, 2007
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