Your Uncommon Life needs a bankroll. This starts with establishing a budget. Previously, we walked through some specific steps to establish a household budget. It takes a little time and effort, but it gives you some crucial numbers in creating a savings plan. After you’ve put a budget in place, you know your total monthly expenses. Of course, the ideal scenario is to generate an excess or profit above your expenses.
Let’s take a look at how to create a plan for saving beyond your expenses.
The first part of creating a savings plan is to set aside some emergency funds equal to about 3 to 6 months worth of expenses.
When we talked about creating a budget, we had you examine your fixed spending and discretionary spending to come up with the total amount you need to earn in a month to cover all of that spending. Now you can take the dollar amount of your monthly fixed and discretionary spending and multiply that by 3 and then by 6. This gives you a range of how much you should have in liquid, accessible savings. This is the dollar amount you are shooting for.
If you have that amount in savings already, great! You can move on to the investment stage of the game. But for most of us, there is some savings to accumulate and some debt to get rid of before we get to investing.
If you know you are starting from zero or less than zero in terms of your savings, then you need to shred debt, and bolster cash. If you have accumulated a lot of debt, don’t worry. You’re not alone. It kind of creeps up on you, between credit cards, car loans, student debt, etc.
When it comes to tackling debt, we like to look at this step in the process as one of using a rifle instead of a shotgun. With a shotgun approach, your money goes into so many instruments, it’s hard to keep track of it all. You may have money in a 401(k) or IRA but are currently up to your eyeballs in debt. That shotgun approach has your money here and there, but none of it available now to help manage your debt.
With the more focused aim of a rifle, you can target debt and also leverage debt. You want to get rid of the debt you can’t leverage – credit cards and car payments come to mind. Pay off the smallest debt first, and then work your way toward shredding the larger amounts.
We are not advocates of eliminating all debt in all situations. There are times when you can leverage debt. For instance, you can leverage your HELOC to do all sorts of things, from replacing a broken dishwasher to putting a down-payment on a rental property. And then there is the potential for leveraging the cash value of a life insurance policy…what we call Uncommon Banking.
Uncommon Banking becomes a source of residual income, but it begins in the savings category. Years ago, you would park your money in a CD and it would get 5% interest. Great. These days that doesn’t happen. Parking your money in a traditional bank is not going to do much for you, while it is creating lots of opportunities for the bank itself. So why not use a safe place for savings that can work for you, directly and immediately?
That’s what happens with a cash-value life insurance policy. You start to build savings, it serves as security for the future, and you can use that cash value to build residual income – which will be a broader topic down the road, so stay on the lookout for that.
With our uncommon approach, your savings plan has 3 components. First, build up your emergency savings – enough to cover 3 to 6 months worth of your household expenses. Then, or at the same time, start working on shredding your debt. When your debt is under control and you are left with only the kind of debt you can leverage, consider a cash-value life insurance policy as a way to build savings AND leverage your money to start building wealth.
Your Uncommon Life needs a bankroll, and here’s how to start building it!