Have you ever paid late fees on your rent? Have you ever had your debit card declined publicly when getting groceries? Have you ever had your long-term plans interrupted because your finances came up short?
If you have, you’re one of the millions of Americans who need margin in their personal finances. To have margin means that you have space, or cushion room, not just for your bills but also for when things go wrong.
The emergency fund is useful, but often dreaded. Establishing such a fund is practical and a basic step in any 101 personal finance article. But it’s also one that is hard to follow through on. Often our thinking about the fund gets skewed by making excuses about what an emergency is and then raiding it anytime we’re out of money.
The problem is that the emergency fund often lacks a goal. This causes any savings to just become a stash of cash that rattles ever louder in our pockets whenever we’re out spending.
What if instead of redefining what an emergency is, we redefined and rethought the emergency fund itself?
Stop thinking about it as a pile a cash you’re reluctant to save with no clear goal in mind. Instead, see the fund for what it is- a stop gap for predictable, non-discretionary automated bills.
In other words, calculate and save the exact amount of money you need each month for your predictable, non-discretionary bills (rent, car payment, gas, insurance, groceries, utilities, loans, etc). By saving that amount and setting it aside you gain margin for those bills.
What this means is that when something unexpected happens, such as a car repair or a layoff, you already have the money you need for all your necessary expenses set aside. This gives you one month’s cushion so that you can rearrange your finances as needed without being late on your rent.
That’s the emergency fund: one month’s worth of all your predictable, non-discretionary bills.
So you’ve started to work on figuring out how much you need for your emergency fund and you know that it has a clear purpose. The next thing that you can do is to automate that fund, both to save for, and pay for, those monthly bills.
Automation isn’t new as a tool of personal finance. Credit where credit is due, one of the best people to first use and advocate this technique was Ramit Sethi who wrote the book I Will Teach You To Be Rich. He advises that people should automate all of their finances. That is a worthy goal, but for our purposes, start by automating your emergency fund.
First, set aside the checking account you want to use for your emergency fund (or open a new one).
Second, remember you had to calculate how much you need for your monthly, predictable, non-discretionary bills? Now figure out how much you would have to set aside per paycheck in order to save that amount each month.
Third, have that amount automatically deposited into that account each pay period.
Fourth, set up that account to automatically pay those bills every month. This can be done either through direct deposits or by having your bank mail a physical check where needed (if your biller is out-of-date).
Now your emergency fund is automated and ready to go without needing to actively manage it. From now on, you don’t have to remember to save the emergency fund or to send out your monthly bills. Automation means less worry and more time for you to focus on other things.
Next, you need to rewrite your financial scripts. This means essentially reprogramming yourself to make healthier financial decisions.
Whether we realize it or not, we all have financial scripts that we’ve been taught since we were born. Narratives about the value of money, and what to spend it on, are ingrained in us by the example of our parents. We also tend to follow the lead of our friends and the culture around us.
Be warned that these scripts are powerful, especially those that come in the form of mass advertising, commercialism, and social pressure. Companies want you to spend your money on unnecessary crap deep down you know you don’t need. Consumers are told they need the latest thing in order to feel good, look good, and to fit in.
In reality, most people blow their earnings on cheap and fleeting endorphin boosts. Be better than that. Wise up to what influences you and why.
Learn your scripts and rewrite them.
Reflect on, and write down, observations about your saving and spending habits. Look for motives, influences, and triggers that cause you to behave in a certain way.
For example, use the following prompts to guide you:
From prompts like these, you can examine your financial scripts and find the hidden good and bad triggers. Feel free to come up with, and respond to, as many prompts as you like.
Once you’re armed with this knowledge you will have greater insight into yourself and will be able to resist those scripts. Now you can consciously write new ones, making it easier to make your own decisions. You may have been programmed to keep up with the Jones, but you choose to ignore them.
You’ve got your automated emergency fund and now you’ve rewritten some of your financial scripts. That’s a great start. But you should eventually aim to budget financial margin into everything you can.
Ultimately, you should create other automated funds for all of your expenses and future goals. This includes fun, discretionary spending like trips abroad or saving for retirement. In addition, you can guestimate and automatically save for predictable large expenses such as Christmas, car repairs, or replacing your phone every few years.
Slowly, but constantly, seek to expand your financial margin. Understand that this will take time but will make life easier. Consider other ways to gain margin as well, such as downgrading your apartment, taking up freelance work, or finding new ways to maximize your tax return.
Always come back to your budget and financial plan. Don’t assume that what worked today will always work tomorrow. At least once a year, revisit and revise your finances and all of your accounts. Tally up everything to know how you are doing and how much margin you have. From there you can decide what changes, if any, are needed.
Revisiting and revising your plans should also be a chance for you to learn from your mistakes and to give yourself encouragement and forgiveness. You have many forces working against you and you must adapt against them in a never-ending battle.
Life happens and sometimes that means a setback. The car blew a tire, you accidentally overspent, the market was bad this year, or any number of things went wrong. Pick yourself up and learn from it.
Sometimes financial scripts are overwhelming. Commercials and people will pressure you to spend more than you can afford on your wedding, on your TV, on clothes, or just about anything. Fight these influences. Try to anticipate them so you’re mentally and emotionally ready when you go against the flow.
Ultimately this is about living your life. If you don’t seize control, then someone or something else will.
Lastly, find yourself some good resources and a community that will support you. The resources and community around you are an important source of encouragement and wisdom. They are often vital in combating bad influences and insidious financial scripts.
The good thing is that there are plenty of free resources out there, including communities that you can plug yourself into. These can include free to low-cost financial classes or groups in your local community organizations, such as a church, a meetup.com group, or a library.
There are also fellow readers here at The Daily Bell you could connect with in the comments and further resources and information in our free guide, Two Year Plan to Freedom.
If you want to build your own community you can start with a few trusted and respected friends or older colleagues. These should be people who you can ask to hold you accountable and who manage their income well. If they don’t do as they preach, then don’t listen to them.
All of these six steps are good tools to you help gain financial margin.
However, one piece of advice remains.
During your financial journey, many people will not understand why you are fighting against what the popular culture regards as normal financial habits. They might see your decision to ignore negative scripts, such as those from commercials, as silly. Some people may even be jealous of your plans. Others will fear judgment from you as you raise the bar for your own success.
This may mean that you will have to avoid talking about finances with certain people. If you know they will only be discouraging or unhelpful then don’t waste your time with them.
Let them judge. Let them laugh. And let them spend money they don’t have. It is their loss, not yours. Start on your journey to financial margin and never look back.