Frugality Archives - Page 6 of 7

The Cash Envelope Spending System: A Great Way To Cut Household Spending

About a year and a half ago my wife and I enrolled in Dave Ramsey‘s financial basics class called “Financial Peace University“. The class aims to help people take responsibility for their financial lives, dump all of their debt, and plan ahead for their future. The class is actually quite fun because of Ramsey's engaging speaking style, and sense of humor, so if you have considered taking the class, I would highly recommend it. If you want a preview of some of his teachings, check out our series on Dave Ramsey's 7 Baby Steps plan for getting out of debt.

In the 13 week class we learned a lot of great ways to cut back on your spending, and how to get out control spending categories back under control. Among those tools were doing a family budget, and having regular budget meetings, in addition to using the Cash Envelope system for budgeting. Today I thought I'd look at how to cut your spending by using a cash envelope.

Setting Up Your Budget

Before you even go down the road of setting up your cash envelopes, you need to set up a family budget. If you don't know what money is coming in, and how much should be going out to regular monthly expenses, it will be hard to actually implement your cash envelopes. So the first thing you have to do is figure out how much money is coming into your accounts as regular monthly income. This is the money you have to work with.

Next, you need to track your expenses so that you know how much money is going out, and to what expense categories. You'll have regular monthly expenses like your mortgage, utilities, taxes and student loan payments that are going to be pretty much the same every month. Then you'll have variable expenses, the expense categories that will be different from month to month. Things that could be included here include things like groceries, dining out expenses, entertainment spending and a variety of other things.

At our house tracking our expenses was pretty easy as we had already been tracking pretty much every dollar coming in and going out via money management softare – Microsoft Money. Because of that we had several years of spending history at our disposal. We were able to take a quick look at our monthly spending, and figure out what we were spending, and what areas were possibly over-represented in our budget (like our dining out spending).

Once you’ve figured out what you need to spend every month on the basics, the next step is to set up a monthly cash flow plan, and make sure that every dollar is assigned a job through doing a zero based budget.

What's a zero based budget? A zero based budget means that once you tally up all income, expense, giving and saving categories, you'll end up with a balance of zero. Every single dollar of income that comes into your accounts will be allocated, and assigned a job.

If you make $5000 of net income, all $5000 of that should be allocated either to an expense or savings category. That way you won’t have the extra money (after expenses) disappearing into the ether. It gets saved, or assigned to a debt, or gets some other job. Your money works for you instead of just disappearing into nothingness.

So to review, to set up your budget:

Figure out your income. For most people this will be the same every month.
Figure out your set expenses. These should be pretty close to the same every month.
Figure out other variable expenses (like food, shopping, entertainment) and assign a realistic dollar amount for that category in the budget.
Put together a zero-based budget where every dollar of income and expense is allocated, and you end up with a zero balance.

Setting Up Your Cash Envelope System

Now that you've setup a budget, and you know how much you need or want to spend on each category, you're ready to set up your envelope system for budgeting. The first thing you need to setup your cash envelope system is… you guessed it – envelopes!

You can just use regular plain white envelopes if you want, or go with something a bit more advanced, like our Dave Ramsey cash envelopes. In any event, the idea is to get something where you can write on the envelope, and keep track of spending, and how much is in your envelope.

Once you have your envelopes you need to figure out what categories you'll be using the envelopes for. I would suggest using them for most/all of your variable spending categories that you have in your budget. Things like dining out and entertainment, household expenses and personal spending money. Anything that could change from month to month. For us we leave out categories that rarely change, and just pay those regularly every month out of our accounts.

The idea behind the envelopes is that it helps you control your spending on certain problem categories by giving you a set amount of money each month in your envelope that you need to use towards that category. When the money is gone from the envelope, you don’t spend any more money on that category. Period. If you absolutely need to spend more, you have to take money from another category to fill in the gaps.

At our house we started using the cash envelopes because we had a couple of big problem categories that we consistently overspend in. Eating out/restaurant spending and shopping spending. My wife and I love eating out, and in some ways eating out is our way of connecting with each other, spending time together and relaxing. If we have a date night we go out to a nice restaurant and enjoy an evening together.

While there isn't anything necessarily wrong with that, our problem was that we were doing it far too often, spending hundreds of dollars a month on dining out. So to fix this problem we added a “restaurant” budget category to our envelope system. In the picture below you can see our envelope for “Restaurants”.

We also set up envelopes for other problem categories where we were prone to overspending including groceries, shopping, entertainment and “blow money” (blow money is personal money we can spend for any reason we want, without asking the other person). So now, when we get paid every month, we withdraw a budgeted amount of cash for all our problem categories, and put them in our envelopes.

So as an example, let's say we budget $150 for eating out in a given month. When our first of two paychecks comes in for the month we'll go to the bank and withdraw $150 for our “restaurants” envelope. Now when we go out to eat we can only spend what's in the envelope. So if we eat out one more time than we had anticipated, and we come up $20 short from our restaurants envelope, we'll need to take that $20 we're short from another spending category or envelope. Barring that we would just have to forgo eating out that last time that month.

If you don't spend all of you budgeted money in your cash envelope you can just have it transfer over to the next spending period, or at the end of the month allocate it to a debt or saving category – which is what we prefer to do.

I know a lot of people aren't real comfortable using the cash envelope system at first, especially if you have a large number of problem categories – and envelopes. You can feel a bit silly pulling out your big cash envelope wallet, or stack of envelopes everywhere you go. We know one couple who goes a bit overboard with their cash envelopes, and they basically have an envelope for every conceivable category. While it works for them, and they end up saving a lot of money, for us it would just burn us out to have so much detail. For us, we just have about 6 main cash envelopes that we use for our biggest problem areas.

So for our 6 envelopes that we were using, we would end up withdrawing about $1000 for each month and assigning it to one of our envelopes. It's a lot of cash, but part of the great part about this system is that when you're actually spending cash like that, you'd be surprised at how much it hurts to spend cash. You'll find that you'll often start playing a game with yourself to see how much money you can have left over in your envelopes at the end of the month. It actually can be fun!

So the key components of an envelope system are:

Set up a zero-based budget, and figure out how much you spend in all categories of your budget.
Find your biggest problem spending categories, and variable expense categories, and set up an envelope for those categories.
Every time you get paid withdraw money to fully fund your cash spending categories for your envelope system.
Only money that is in your envelopes can be spent. If a spending envelope doesn't have any money left , you're done spending for that category for that period. If you need to spend more, take it from another envelope and category.
Left over money goes towards savings or gets rolled into a debt snowball to get rid of debt.

Cash Envelopes WILL Save You Money

Using the cash envelope system for spending can have an amazing effect on how much money you're spending every month. We saw that first hand when we saw our restaurant spending drop from $4-500/month to closer to $150-200/month. That extra several hundred dollars we saved every month went directly to our 1 year emergency fund, which grew that much quicker!

Not only are you limiting how much you spend by using the envelopes, but you're also using psychology on yourself. Studies have shown that when you use a credit card, even if you’re paying it off every month, you spend on average 12-18% more. Spending cash hurts more, andwhen you pay cash, you'll end up spending less by default. And spending less than you earn is the key to anyone's success.

What do you think of the cash envelope system? Do you currently have problem spending categories that you think could benefit from using a cash envelope? Do you think the system could be effective for you, or have you used it? Tell us your thoughts in the comments.

What Separates Millionaires From The Average Joe? Discipline, Frugality and Moderation.

By Mr. Money 4 Comments

When looking at what makes people successful, people often attribute wealth and success to things that really aren't the cause. For example, people often assume that the wealthy only got to where they are because they inherited their wealth, and because they did unethical things to cheat people out of their money. The reality is that most millionaires are first generation wealthy, and that they got to where they are because they place a premium on ethics and are extremely fair in how they treat other people.

So today, I want to do a quickie post talking about another misconception, and talk about a few attributes that set the wealthy apart from those who aren't.

Discipline, Frugality And Moderation Lead To Success

We're often told that the wealthy are prone to great excesses, and that they love to spend lavishly on things they don't necessarily need. In some respects people believe that the wealthy lack a sense of moderation, and that they love to spend. Quite the opposite is true.

One thing that often leads to success for the wealthy is the fact that they are disciplined in the things that they do, whether it be in researching and planning their financial lives, or if it comes to being disciplined in their eating and exercise habits. They learn their outlook on life via their parents who taught them the value of discipline, frugality and moderation from an early age.

Author Thomas J. Stanley discusses this point in a recent post where he talks about calls for government restrictions to fast food consumption.

Just like hypereating is a danger to one's physical well being, hyperconsuming is a danger to one's financial well being. So what does this all have to do with millionaires? Most millionaires eat and spend in moderation. They are well disciplined. In fact, it is rare to find any of the millionaires whom I have interviewed one on one or in focus groups to be overweight. I have found that the typical millionaire, a male, is 5'10” tall and weighs 184 pounds. Decamillionaires are about an inch taller and 3 pounds heavier. After reviewing this data, I was prompted by the numbers to review my latest copy of the Forbes 400 issue. Looking at the pictures of the wealthiest 400 people is telling. Bill Gates is hardly overweight nor is Steven Jobs or Larry Ellison. One must be well disciplined to achieve the status of a Forbes 400 designation. This discipline extends to the consumption of food.

The problem often isn't necessarily that someone doesn't have the opportunity to succeed due to their situation, it's the fact that they haven't been given the tools to succeed by their parents. They haven't been taught the value of hard work, discipline, frugality and moderation. They see the excesses that society says is ok and laudable, and they shoot for those goals, when in fact discipline, moderation and frugality are the actual keys to success.

The habit of eating in moderation among the wealthy in America was not developed via government mandates and laws. Most economically successful people tell me that their disciplined lifestyle including consumption habits originated from their upbringing. In other words, the parents mold the child. They are the ones who dictate how much the child eats and where he eats.

Today a good number of millionaires patronize fast food restaurants. In fact 47% of those in the $1M-$5M net worth category reported eating at least one meal inside a McDonald's within the last 30 days before being interviewed. Forty percent of those with a net worth of over $5M did the same. If anything these numbers understate their patronage since my question did not ask about drive-in or take-out orders.

What can I say about children who are taught the benefits of discipline, frugality and moderation? They are much more likely to become economically successful and satisfied adults than those who were raised in an atmosphere void of these characteristics.

So having discipline, frugality and moderation are key ingredients to becoming successful in life, no matter what your starting point. If you have those things, you'll be much more likely to be economically successful – and satisfied adults.

What are your thoughts on this. Do we understate the importance of these things – discipline, frugality and moderation? Tell me your thoughts in the comments.

Personal Finance Basics: Negative Events Will Happen To You. Plan Ahead With Insurance And An Emergency Fund

By Mr. Money 3 Comments

When thinking about topics to write for my Personal Finance Basics series, one of the first ones that came to mind was the topic of planning ahead for emergencies. It's such a basic concept and one that will affect a majority of us, but unfortunately only a few of us ever plan ahead for unplanned expenses or emergencies.

Today I thought I'd take a look at planning ahead for emergencies.

Everyone Has Emergencies

Whether we like it or not, we all will face emergencies or unplanned negative events multiple times in our lives. In fact, the stats are against us:

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

Let's look at that. 78% will have a MAJOR negative event in a given 10 year period. At our house that has certainly held true – in fact we've had 3-4 major negative health events in the past 10 years. I wonder what the stats are for minor negative events – my guess is that it runs close to 100% With numbers like those it's a sure thing that you're probably going to need to have some sort of a backup plan. At our house our backup plan includes an emergency fund and plenty of insurance.

Insurance Helps Cover Against Major Negative Events

The first thing we've done at our house to plan ahead for major emergencies is to make sure we're covered when it comes to insurance. What types of insurance should you have? We would suggest having good coverage in the following types of insurance categories:

health insurance
life insurance
disability insurance
homeowner’s insurance
auto insurance
long term care insurance

What types of insurance you decide to buy will depend largely upon your personal financial situation, and whether you’re secure enough to self-insure. At our house we've got a ways to go so we've got everything on the list except long term care insurance, which we plan on buying after we turn 60.

While we have insurance in most of the above categories, the one that has more than paid for itself is the health insurance. A couple of years ago my wife had some major health events that meant she has spent close to a month in the hospital over the past couple of years. Our insurance has paid for almost $300,000 in medical care during that time while our out of pocket costs and premiums have been closer to $15,000. If we hadn't had insurance, we would have been in a world of trouble.

Give yourself that insurance umbrella in case the skies get cloudy and it starts to rain.

An Emergency Fund Pays For Smaller Emergencies And Negative Events

While insurance is great for transferring risk of major medical events, car accidents and disability to the insurance company, it isn't going to cover everything. There are a lot of negative events that can happen that won't be covered by insurance.

Car repairs
Emergency room visits
Unplanned hospitalizations
Unplanned travel expenses (funerals, weddings, etc)
Job loss
Water heater goes out
To pay for occasional expenses (property taxes, insurance)

To help cover the risks of negative things that can happen in life (like the things listed above), it's important to save up an emergency fund. The problem is, most Americans haven't done that.

A Gallup poll from a few years back that found only about 4 in 10 Americans say they actually have cash on hand in case of an emergency. Only 10% say they have $1,000 in cash available in case of an emergency. In fact, they found that most people say they will rely on other sources of emergency funds if it came to it including credit cards, family members or 401k loans.

In my opinion that's just bad planning – you should be saving up cash in an emergency fund.

How Much Should Be In Your Emergency Fund?

Experts vary on how much they say you should be saving in your emergency fund – and they'll give you different amounts depending on whether you're still in debt or not. If you have no other debt most will tell you that a good number to have saved is 3-6 months of expenses. In our case we're saving up almost a year of expenses to cover us in case of a job loss, major medical event or other catastrophe. We just feel safer having that much, especially with the economy being on the rocks as it is currently. It really depends on your personal level of risk you're willing to take on.

Your age, and status will also affect how much you save. If you're young and single with no major debts or obligations, you might get by with a smaller emergency fund. Have a large family and are a bit older? You might want to save up a larger emergency fund.

You will also want to take into account whether you are expecting a big event in the near future. Do you have a baby on the way, or foresee layoffs at your company? It may be time to stockpile cash.

Emergency Funds And Insurance Give Peace Of Mind

For me one of the biggest pluses of having a large emergency fund and plenty of insurance is the fact that I have peace of mind knowing that if something bad happens (and it will), we're covered for most situations. We've transferred risk from ourselves to the insurance companies for most possible major negative events, and self-insured ourselves against the smaller events. Because we've planned ahead we have less stress and we're able to focus on other important goals like boosting our income and creating wealth.

Have you protected yourself against the probable chance of life's little emergencies? Do you have insurance and emergency savings to cover you in case of a major or smaller negative event? Tell us your thoughts on planning ahead for emergencies in the comments!

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time

How To Save Money When Buying A Car

By Mr. Money 5 Comments

We're in the middle of a search for a bigger vehicle for our family. We recently had our first child, and my wife's little Honda just isn't cutting it anymore when it comes to carting around the baby and all his stuff. It's just getting too cramped. At this point we're looking into what type of vehicle to buy – anything from a mini-van to a smaller SUV. While we haven't settled on anything, my wife can't stand mini-vans, so we're leaning towards buying a SUV.

When buying a new car, there are a lot of things that you can do in order to save money on your purchase. Some will save you a little money – and others will save you hundreds or thousands of dollars. So let's get started!

Things You Can Do To Save Money On Your Automobile Purchase

Saving money on your auto purchase can be done in a variety of ways – from doing your due diligence and research before you shop – all the way to figuring out what make and model to buy. Here are the tips we're using to save money on our next purchase.

Research potential cars, and how to sell your own: If you're looking for a new car, make sure that you give yourself time to look into exactly what type of car you want to buy, how much it should reasonably cost, fuel efficiency, reliability and other factors that can affect your decision. Also look into selling your current car, and figure out how much you can get for it either by selling it as a private party sale – or by trading it in. Use sites like CarSoup.com, Autotrader.com, Edmunds.com and ConsumerReports.org to give you a ballpark value of what your car is worth so that you can get top dollar for your car.
Used vehicles save you thousands: When buying a car we often dream of buying that high end luxury ride, instead of buying something that just fits our needs. We want a brand new car that still has the showroom smell. If we are honest about it, however, we can see that buying a pre-owned car, one that's 2-3 years old with low miles – will end up saving us thousands of dollars. The reason? New cars lose up to 60% of their value within the first 4 years. That's a lot of value just disappearing into the ether! Instead of buying a brand new car, do as we did with out last car. We bought a 3 year old sedan that was close to $20,000 new. By buying the same car as a used car, we got it for around $11,000, and it only had 29,000 miles on it! (plus it still felt like it was brand new anyway!)
Buy from a private owner: When you buy a car from a dealership, there is going to be markup over what you might pay to buy the car from a private party. That's why when you go to Kelly Blue Book's website, there is a price for retail and one for private party that is lower. One caveat – just make sure that you get a vehicle history report and having the car inspected by a trusted mechanic to ensure you're actually getting a good deal.
Paying cash saves interest: My wife and I have been paying ourselves a car payment for the last few years. The result is that after a couple of years you end up having a nice stash of cash to pay for your next car in cash – instead of getting a loan. While rates may be low right now, you'll still save by paying cash instead of getting a loan (of course unless you get one of those 0% financing offers – in which case you're probably not saving by getting a used car). Set up a high yield savings account, and start saving your payments!
Rental cars can save you money too: Our last two cars that we purchased were both rental cars. While you might think that buying a rental car isn't a good idea (there is a common thought that rental cars are driven harder than other cars), we've found that for our family it ended up being a great deal. The rental cars that we bought were lower in price, but were both in great shape – and had been maintained meticulously by the rental agency. My last one drove wonderfully until i got rid of it at 130,000 miles.
Extra options mean big money: If you leave off extra options like sunroof, leather and premium sound packages, a $20,000 car can quickly become a $16,500 car. Carefully consider which options you actually need.
Negotiation on price may be necessary: Sometimes whether you're comfortable with it or not, you may need to be willing to negotiate with a car dealer to get the best price. If you don't like negotiating, consider getting a family member who doesn't mind doing it – to do it for you. Make a game out of it offer to give your friend or family member a percentage of whatever they save you in negotiation.
Make sure to get an inspection and a vehicle history report: Pre-owned cars will have different histories, and you need to be careful that you don't buy one that has negative events in it's past. Get a vehicle inspection from a mechanic you trust, and also get a vehicle history report to confirm it hasn't had flood damage, accidents or other negative events. Skipping this step could cost you thousands down the road.
Don't buy an extended warranty: Extended warranties are one of the places that car dealerships make some of their biggest profits. The reason? Most people that buy them never use them. If you want to get a warranty anyway, consider buying from an outside company for less than you can get a policy at the dealership. Or even better, self insure yourself against the risk of mechanical failure by saving up a “car repair emergency fund“!

There are lots of ways that you can save when buying a car. Some of the tips will save you more than others – but really it all comes down to doing your research, preparing yourself, and going out to do battle – to save money!

Have your own tips for saving money when buying a car? Tell us your car buying strategies in the comments!

Stop Acting Rich: Don’t Allow Displays Of Wealth To Substitute For Real Wealth

By Mr. Money 11 Comments

We all have friends that love to buy the finer things in life. They drive nice cars, live in a big house, and when they dine out they always go to the expensive places with the trendy eats. In short, they live a high dollar lifestyle where they love to display their wealth for everyone around them to see.

The thing is, quite often those same people who are living the high-consumption lifestyle are the same ones who are struggling to get by with huge mortgages, large car payments and home equity loans. Even if they've got relatively high incomes far too often they live beyond their means.

Time To Stop Acting Rich

In his book “Stop Acting Rich“, Thomas J. Stanley talks about how far too often we are substituting a life of actual wealth creation, for one where wealth is only an illusion.

Ours is a culture of hyperconsumerism. Not only can and do we buy nearly anything (except for the truly outrageously expensive), but we seem to have come to believe that we can and should have it all and that who we are is dependent on the ability to live in the right neighborhoods, with appropriately sized homes filled with brand-name appliances, with prestige cars parked in the driveway with expensive golf bags and clubs in the trunk and so on. And so we spend.

We spend to excess, and attempt to display a persona to those around us that says “I'm successful”. The problem is, most of the world's millionaires aren't living a high consumption lifestyle with all the expensive trappings. In fact, most of them have become wealthy because they are able to live below their means, and live less “flashy” lives.

You can act rich or actually become rich. Few of us will ever be able to do both, and we certainly won't bet rich by acting the part before we have the financial resources with which to pay for la dolce vita.

We live in a time when it has never been easier to act rich than to actually become rich, even with the devastation of the financial crisis. At the end of the day, not only are we bad actors because it is simply impossible for us to keep up with the glittering rich (if we buy one expensive, prestige car, they buy 20), but we are terribly misguided and ill informed about how millionaires really spend and what they actually buy. Instead of focusing on millionaires generally, we are enamored with the few glitteringly rich people.

Know first who you are, then adorn yourself accordingly – Euripides

We fool ourselves, and think that we can emulate the glittering rich lifestyles of the rich and famous – before we have the income to match – and afford the lifestyle.

If we truly want to be wealthy, we have to life below our means, and live a lifestyle that allows us to build wealth.

How Do Millionaires Spend?

When Stanley actually surveyed millionaires in his studies he found that they as a group were much more frugal than most people might think.

Let's look at how real millionaires spend their money and what they pay for goods and services. Real millionaires pay about $16 for a haircut at a traditional barbershop… Only 5.7 percent of millionaires surveyed nationally paid $1000 or more for their most recently acquired suit… The watch he wears every day was purchased at a Wal-Mart store for $15..

Real millionaires don't mind spending money, but they also know about buying things that give you good value. They don't splurge on things they don't want or need, and instead they save their money, invest, save and give. They also find greater pleasure in enjoying things that don't cost money. Spending time with family, enjoying the outdoors, and working hard at their chosen profession.

Conclusion

So what's the conclusion that we can draw from how real millionaires live? That the truly wealthy in this country aren't the ones we see around us driving the expensive cars, or living in the 10,000 square foot homes. Those people are more than likely over-extended and in a hole. The truly wealthy are those that don't have to flaunt it. They drive cars that have good value, and homes that are in the 300,000 dollar range. They became wealthy by living frugally, saving and investing the income that they created. They're the ones I hope to emulate as I go on my own journey towards wealth.

Do you know people who live beyond their means and appear wealthy on the surface? Do you know someone who is truly wealthy? What do you think about the ideas of appearing wealthy vs. actually being wealthy? Tell us your thoughts in the comments!

Three Steps You Can Take To Turn Your Financial Life Around

By Mr. Money 3 Comments

After we got married just over 8 years ago, my wife and I entered the marriage with more debt than we would have liked. My wife had zero debt, and I came in with student loans, credit card debt (for our honeymoon) and a loan for my car. We weren't happy with having so much debt, and after a couple of years of slowly paying off the obligations, we decided to take things a bit more seriously. We wanted to get out of debt and get on track for an increased net worth as fast as possible.

Here we are several years later and we're now back on track. We have no debt (except a mortgage) and we're slowly building up a nice nest egg that includes savings, retirement accounts and insurance.

Here's are three things that we did that had the greatest impact in helping us to turn things around.

Start Tracking What You Spend And Set Up A Budget

The biggest change that we made was to actually start tracking what we were spending. When we got to the end of the month normally we would be at the end of our bank account – with not much left over to save or pay extra on debts. The money was just gone and we didn't really know where it had gone.

After reading Dave Ramsey's Total Money Makeover we started actually tracking where our money was going for a couple of months. What we found was that we were overspending by huge amounts of money in our eating out category and in our entertainment spending. There was a lot of room for making cuts.

Once we had tracked our spending for 2-3 months we actually set up a budget and cash flow plan at our house. We started working on a zero based budget suggested by Ramsey where you allocate every dollar to either a spending, saving, investing or giving category before the money even hits the account. You allocate every dollar, and if you have money left over at the end of the month – it needs to be re-allocated to a category. If the money isn't given a name and given a job – that money has a way of disappearing.

We quickly found that once we started using our budget, and not spending more than had been allocated in different categories (using a cash envelope system), we ended up having several hundred dollars a month left over that we hadn't had before. And it wasn't like we ended up making any painful cuts or hard decisions. That's quite a turn around!

Set Up An Emergency Fund

Another thing that made a huge difference for us, while we were paying off debt – and once we had it all paid off – was having an emergency fund. According to a Gallup poll a few years back, Only 10% say they have $1,000 in cash available in case of an emergency. That's not good!

In the past I had always thought that having a credit card was just as good as having a cash emergency fund. But what I realized later on was that using a credit card to pay for life's little “emergencies” just helps to continue a cycle of debt by creating new debt – when you could have instead planned ahead and had the cash to pay for it up front.

So how much should you save in an emergency fund? It depends on what you want your level of security to be, and the amount of risk you want to take on by not having an emergency fund. At our house, and in this economy, we currently have about a 10-11 month emergency fund (we can pay for 10-11 months of our expenses if we were to lose all income tomorrow). We just aren't optimistic about where our economy is heading, and we want to make sure we're prepared for the worst. While we were paying off debt we saved up $2000 in our emergency account because we figured that would cover most problems that could happen.

Try Living A Cash Only Lifestyle

The third thing that we did that had a huge impact was switching from a lifestyle financed by credit and loans, to one financed strictly by cash. If we want to buy something now, we pay for it with cash. Now that doesn't necessarily mean we pay for everything with crisp new $20 bills, but it does mean that we don't buy anything unless we have the cash on hand in our bank account to pay for it.

A couple of examples of how things changed in our life.

We needed some new furniture for our new house when we moved 4 years ago. In the past we probably would have financed the furniture at the store or put it on a credit card. Instead, this time we had planned ahead and saved the cash to pay for it up front.
Two years ago my car started having problems, and we knew we'd have to buy a new car to replace it. Instead of buying an expensive model financed at the dealership as we had in the past – this time we had saved up enough money every month in a “car fund” to buy a nice used car – that was new to us. A paid off car just drives so much nicer than one with a huge loan on it!

Paying cash and not having new debt is so much more freeing!

Planning Ahead, Saving Up And Living Within A Framework

When you look at the three points above, they all have something in common. They involve taking a look at your life, and making a decision to live with a plan, to thinking things through and making rational decisions that will pay off down the road. They involve living with delayed gratification, and deciding that you want to make sacrifices today so that tomorrow will be a brighter day. Making those types of decisions isn't always fun, but in the end it will pay off.

What other things would you suggest people do – or what are some things that you have done that have made you more successful? Tell us your thoughts -and your tips and tricks – in the comments!

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