The answer is your mind set. How you think about money greatly affects your potential for long term financial success. When working with clients that had a hard time building and maintaining their cash reserve I would explain it to them like this.
My definition of a “nest egg” or “cash reserve” is money that is set aside and is added to monthly so that it continues to grow until it is needed for an emergency. First you need to agree on what an emergency is that gives you permission to withdraw from this account. An emergency may be, basic food in your mouth, basic clothes on your back, reasonable transportation, etc. An emergency is not a family vacation, buying because of a great sale, more clothes when you already have the necessities, etc.
If an emergency came up today and you needed, for example a new roof on your home, where would you get the money from to fix it? The answer always seems to be, I wouldn’t have a choice. I have to have a roof so if I didn’t have the cash I would need to take out a loan and get the roof fixed. My next question is, where will the monthly money come from to make the payment on that loan, since you are not able to put money away and keep it there now, that means that you are now living on the income you have? The answer usually is, I don’t have a choice, I would have to cut back on what I could so that I can make the payments needed to be able to have a roof on my home.
Really think about this scenario. If you can cut back when an emergency arises because “you have no other option”, why wouldn’t you just cut back now so instead of having to go into debt and pay interest on a loan that you cannot afford, you can be your own “bank”. If you know you can do it if you were forced to, odds are you can do it now if you really want to. The problem is your priorities may not be in order.
Here’s how I suggest you handle this. With every dollar that goes through your hands there are three places it needs to go, not necessarily in equal thirds, but in three places.
#1 Pay your bills – or you may not have your freedom for long.
#2 spend some – if you save it all ‘till later and don’t live to enjoy it, what good
would that be?
#3 save some – to cover the larger ticket items that the weekly paycheck won’t
cover and so that someday you won’t have to work anymore.
The problem with many people today is that we do pay our bills, which is a good thing, but we spend some and save what’s left, and that is backwards. You should be saving first and then spend what’s left. Having a long term vision for your future rather than living for today is also a critical factor for success.
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