An unfortunate reality today is the staggering amount of people living paycheck to paycheck without a proper emergency cash reserve, or safety net, to get them through times of financial instability. A recent CNBC article stated that since the Covid-19 pandemic began, approximately 63% of Americans live paycheck to paycheck, and approximately 80% of Americans could not cover the cost of a $500 emergency. While this crisis is temporarily being addressed by government stimulus checks, enhanced unemployment benefits, and small business loans, these programs will not continue in perpetuity. As a result, consumers must become more mindful of their spending habits, realize that much of what they consume is unnecessary, and develop financial plans to address their vital needs regardless of the economic environment. Now is an ideal time to start planning. See below for tips!
Create a Spending Value System
One way to control spending is to ensure you consume things that genuinely add value to your life. This should be a comprehensive overview including, but not limited to, food, shelter, entertainment, transportation, exercise, etc. If you live from paycheck to paycheck, you must review every aspect of your life to see where cuts can be made. For example, do you really need TVs in every room of your apartment/house? Do you need the Netflix, Disney +, Peacock, and HBO Max streaming subscriptions, or could you survive with just one? Do you need to eat/order out as much, or is cooking at home an option to save money? All options need to be on the table! These items seem basic and maybe even inexpensive, but can save more money than you realize. Again, what purchases truly add value to your life, and what is unnecessary/wasteful consumption?
Plan for the Worst, Hope for the Best
While most of us are optimistic by nature, we must be more pessimistic in how we handle our finances. While there are certainly opportunity costs associated with building a strong safety net, the costs of not building one can be catastrophic. A simple guideline for a strong safety net is to take the net amount of money you spend each month and multiply that number by a factor of six. This is the amount of money you will need safely secured in checking, savings, or money market type accounts. While the temptation will be great to tap into these funds during more prosperous times, fight the urge by convincing yourself that another black swan event like Covid-19 could be right around the corner.
For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.
Fox 6 Talking Points:
- Be Skeptical of Marketing
- Create a Spending Value System
- Plan for the Worst, Hope for the Best!
Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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