For a minute, I want you to imagine that something terrible has just happened. Perhaps you’ve just received an unexpected bill from the tax man, perhaps the washing machine has just blown up, or perhaps the car's just broken down. What are you going to do if you don't have any savings? I know what happens for most people, and that is they usually reach for their credit cards.
Of course credit cards can seem like a good idea in these situations because using them means that you can get the car back on the road or get the washing machine fixed. But the problem is, if you're trying to improve your finances, it’s these unexpected events which quite often derail our plans and it make it very difficult to get back on track. Why? Because when you use a credit card to pay for something, you’re only delaying that expense until the end of the month. More often than not, if you’re in that situation, not only can’t you afford to pay the bill when it arrives, but also you've started to get back into the habit of using your credit cards to buy more things and it won’t be long before you’re no longer living within your means.
The good news is there is another way. I want you to set up something which I call a Crisis Chest. It's a savings account which has a very specific purpose - that is you're only going to touch that money when you have a crisis. Then I’d like you to set up a standing order to transfer an amount into that account every single month. At the start it doesn’t really matter how much it is. You can start off with a very small amount, but you should give yourself an initial goal of how much you want to have in there. For example, £250 might be a good place to start.
Once you’ve saved up that cash, not only will you have the funds to cover many types of minor emergency but, more importantly, you’ll be able to relax because you’ll know that when the washing machine does blow up or the cat needs vaccinations, you'll have some money put aside. And once you’ve saved £250, why stop there? Without realising it, by putting away some cash every single month, you’ll have gotten into the habit of saving. So why not aim to save 2-3 months’ worth of expenses in case something more serious occurs, such as (heaven forbid) you lose your job? Wouldn’t that take the pressure off?
Just one final point about the standing order. If you wait until the end of the month to see what cash is left before you put some money aside there will never be any. Make sure that money gets transferred out as soon as you get paid. Also, start off with small amounts and then gradually increase these over time as you get used to adjusting your spending. That’s the best way to deal with the unexpected and it’s also the best way to help you sleep better at night….
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