Sit On A Cash Cushion
 

The next step to build your fortune is to set a goal for your savings, and then achieve it. This is money you’re going to set aside for no reason other than an increased sense of personal security and prosperity. This exercise is also an introduction to reaching goals and it will give your morale a nice boost.

From the previous section you know exactly how much you have in your savings and checking accounts right now. Can you write yourself a check for $100 and deposit it in your savings account without overdrawing your checking account? How about $500? $1,000? $5,000? Just how much do you need any way?

Figure your monthly or weekly net pay and subtract what you save. If you net $1,000 every other week and save 10% then you’re using $900 every pay period to cover expenses. In this case that works out to $450 a week.

If you get paid monthly, try to save one to three months of expenses. If you’re on a weekly or biweekly schedule, that’s about four to sixteen weeks. How long will it take you to save that amount? That depends on your savings rate. Use the chart in Figure 5 to determine the answer.

Figure 5

The chart above tells you how many weeks or months you need to save given the percentage of each pay check you save and how many week’s or month’s expenses you want to save. For example, if you save 15% of your monthly take home pay you will have saved two months of expenses within one year. Let’s put some dollar figures with this.

Say your monthly take home pay is $2,000. If you save 15% you are saving $300 and spending $1,700. That means two months of expenses is $3,400 ($1,700 x 2). Divide $3,400 by $300 savings per month and you come up with just over 11 months.

Note that if you get paid biweekly the number of weeks it takes to save any amount is the same as the number of weeks if you’re paid weekly. It makes no difference.

Now that you know how much you can save, as a percentage of your income, and how long it will take to achieve it, go forth and build your cash cushion. You absolutely need to have at least this much of a safety net – it can’t hurt to have it.

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