“I’ve just found out that my company is going to be laying off some workers next month, and I think that I might be one of the unlucky ones. If they let me go, my redundancy payment would be very small and I’m worried that it won’t be able to last for long.
“The only money I have is saved is in an insurance policy, which I don’t want to touch. What can I do if I get laid off?”
As we say in Jamaica, ‘trouble nuh set like rain’. Sometimes problems don’t come with clear warning signs like dark clouds before a heavy rainstorm. While I hope that your fears are unfounded, it highlights a need for a savings plan to give you cash in the event of any emergency.
Financial experts say that you should put aside money to cover three to six months’ living expenses in case of a medical emergency or job loss.
The emergency account would replace your income and pay your bills until your job search is successful. It would also cover you through a disabling illness or pay for an unexpected cost like a new roof after a bad hurricane.
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Emergency savings are not only for those who might be struggling to make ends meet. If your net worth is large, but your assets are not easily converted to cash, you may be at risk.
I have seen persons owning houses, land, and stocks worth millions of dollars, but they don’t have cash for two months’ expenses in an account. If a crisis came, they would be forced to sell the real estate, which can take a long time.
The first step to setting up an emergency account is to figure out how much it would take to pay for your absolutely necessary expenses every month. Tally up all your basic needs- rent or mortgage, food, utilities, transportation, children’s expenses.
Exclude all the niceties like doing your nails and buying movie tickets. Multiply this total amount by the number of months that you think you should ideally set aside for. This is your target to save up in your rainy day account.
Once you have an idea of your non-negotiable monthly expenses amount, the next step is to establish a plan to save until you reach your target. If you decide that you want to achieve your goal in a set number or months or years, get help from a financial institution to work out how much you need to save per month.
If you know you can only save a fixed amount per month, ask the expert to work out how long it would take to get to your targeted amount.
For example, if your expenses are J$30,000 and you want to have four months’ rainy day money saved up in two years’ time, you would need to invest about J$4,500 per month at a net interest rate of 7.5% per annum, compounded monthly. However, if you can only afford to save J$2,000 per month towards this goal, it would take over four years.
You should save this money in the highest interest-earning account you can find. To remove the temptation to withdraw from it, don’t link it to your ATM card or have it at an institution that’s convenient to access. Remember that this account is not to be raided because you forgot to put aside money to pay your car insurance bill.
Seems pretty simple, right? Then again, maybe not. When money is tight, saving up to just have money waiting in the event of an emergency might sound impossible. What’s more, your rainy day savings should be separate from your other savings needs – the deposit for a house, children’s college fund or your retirement.
To further complicate matters, what if the emergency arises before you’ve saved up enough to make a difference, as in your case?
I know that saving for some eventuality we hope will never happen is not very encouraging. But the flip side of being left without a job and money should provide enough inspiration to make it an important goal.
Since an emergency can strike without warning, it is a priority to get to your targeted amount in the shortest time possible. Here are a few ways to boost your rainy day account:
1. If you’re throwing a partner, put the draw towards your emergency account.
2. If you get a bonus or profit share at work, pretend it never came and put it aside.
3. Make a sacrifice by temporarily suspending your cable or internet service and save that money.
4. If you’ve finished paying off a loan, redirect the money into your account.
5. Find out if you are eligible for a National Housing Trust refund and have them send it to your account.
My advice for you- don’t wait for the ball to drop. Dust off your resume and start job hunting. Start conserving money from now. Consider how you can use your skills and talents to earn more money.
In the coming weeks, I’ll show you simple ways to reduce your expenses and to be innovative in making more money.
Copyright © 2006 Cherryl Hanson Simpson. No reproduction without written consent.
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Originally published in The Daily Observer, March 30, 2006
Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl