Sunday, Jul. 26, 2009

Living with less: Keeping unexpected expenses at bay

Building an emergency fund can keep unexpected expenses at bay

Mary Beth Henry is looking for a little more wiggle room in her budget.

The West Columbia single mother of two tracked her spending in June.

And after counting about $1,500 in utility bills, groceries, the house payment and occasional restaurant visit, she had about $100 left over from her paycheck as an apartment manager.

But an unexpected $400 car repair depleted Henry’s savings. That’s left her with about $800 in the bank.

“I don’t feel like I have enough in savings in case something major happens,” she said.

That’s what worries West Columbia financial planner Neil Brown.

Brown, who is working with Henry to end her cycle of living paycheck-to-paycheck, said her first goal should be building an emergency fund.

A good fund should cover three to six months of living expenses if she loses her paycheck, Brown said.

In Henry’s case, that would be $4,500 to $9,000.

So how does Henry turn a three-figure savings account into one in the mid-four-digit range?

Tracking her budget helped Henry realize where she could cut some costs.

She quickly replaced her nearly daily lunch outings with frozen meals last month — a savings of about $100.

“There was nothing left at the end of the month even with my dad helping me,” Henry said of her old dining-out habits. (Her father had helped pay some of the $686 monthly mortgage before he died in April.)

Brown said he did not see a need for Henry to make a drastic change — such as cutting off the cable TV. And Henry can’t cancel her Internet service because she takes online courses in her pursuit of a teaching degree.

But Brown suggested a way for Henry to better focus on savings.

He recommended she keep a small amount of money in her checking account and put any extra cash into a savings account.

Brown said he has kept $700 in his checking account since graduating from college 18 years ago.

When a paycheck is deposited, Brown pays his bills and puts any remainder above $700 into a savings account.

Then he uses the savings account to pay bigger semi-annual bills — such as car and life insurance premiums, and property taxes.

Brown also uses it for any special one-time purchases, like a big-screen television he saved up to buy last Christmas.

Brown said he has one friend who keeps several separate accounts to save money for different big purchases so he can see when he reaches a goal.

“I think it’s best to keep it simple,” he said.

Brown also stressed to set realistic goals in what Henry could put into a savings account now.

“Saving $100 a month is doing better than most people,” he said.

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