Your personal finance safety net

By Scot Herrick | Personal Finance

Mar 31

When dealing with your personal finances, I’ve long recommended saving one year’s take-home pay. I have seen few personal financial advisers favor that amount of savings; most say an emergency fund typically three to six months long. That’s hard enough to do, I understand. But Cubicle Warriors take the challenge and get the savings out further. It is a step to personal finance competence. Why one year’s savings? There are good reasons.

Personal finance competence helps psychologically

Living from paycheck to paycheck is fraught with risk. Let’s talk about stress. And despair. When people are under stress, they are not as open to opportunities and are less creative. Desperate people make necessary – but stupid — choices. Especially stupid choices with their career. The high-performing business analyst becomes the dishwasher. The middle manager becomes the Wal-Mart greeter.

That is not a knock on either dishwashers or people that work at Wall-Mart. But what happens is the high performing person changes what they do, having a significant affect on their skills, mind-set, and capacity to move forward. It is tough to get perspective when one is feeling desperate.

Personal savings help ride out the storm

In case you didn’t notice, we’re in the middle of a hurricane in this recession. This one is one of the longest recessions since the Great Depression and shows no signs of ending. Unemployment continues to rise and the U6 measurement of unemployment – the one used in the 1980’s – is close to 15%. Finding a job in this environment isn’t easy – and takes a lot longer.

Having a three or six month emergency fund is far better than most – but not near enough to keep stress and desperation at bay. A year’s worth of take-home pay in the bank goes a long way to salve the pain of not having a job.

Getting your personal finances right puts your career on offense

Right now, most people are playing defense with their career. They are hoping to not get laid off, keep their job and keep their health insurance. That’s understandable. But part of what I teach in How to survive a job layoff is that now is a great time to stop playing defense with your career and go after what you want to do. There is opportunity in this ugly environment simply because of the churn. Yet, if you don’t have your personal finances in order, you are less able and willing to take the risk of getting your career on offense.

Paycheck to Paycheck

So how much take-home savings do you have right now in the bank? MarketWatch notes that:

MetLife released a study last week showing that half of Americans claim they could not go a month without a job — roughly two paychecks — before failing to fully meet their financial obligations. More than one-in-four said they could not make ends meet for two weeks if they lost their job.

Discover’s monthly U.S. Spending Monitor study found that consumers are increasingly anxious. Just 47% said they had money left in February after paying bills, down from 51% who said the same in January. Moreover, the percentage of people who fear they’ll fall short in the next month was higher.

These numbers, I think, reflect how difficult it is to save and how vulnerable our houses, credit ratings and family stability are. Yet, if you distinguish yourself with a year’s take-home pay in the bank, the numbers also tell you what a significant advantage you have in this difficult environment. Conquer this challenge.

What’s in your bank account?

  • […] knows — what needs doing to get you ready for a layoff. I’ve always advocated having one year’s take-home pay in the bank. A whole year. Nothing beats anxiety — or desperation — like money in the bank. A […]

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