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How to build a financial safety net

by Ann E. Smith

Created on: January 31, 2009

Given the current turbulent economic times, those who have a financial safety net are fortunate, as they may need to rely on it. It is not too late, however, to start building one.





A financial safety net is slightly different than 401(k) savings, as the primary goal of contributing to 401(k) is for retirement. With a financial cushion, your goal should be to have enough money to support what it takes for you to live for six months.




This would include your mortgage or rent payments, utility bills, food bills and all other living expenses. Building such a cushion is crucial, as you it can help you have more peace of mind during a tough economy when your job may be in jeopardy due to layoffs.




To build this safety cushion, you are going to have to make sacrifices on a consistent basis. However, it will be well worth it in the event you need it. Below are some actions you can take to build a safety net.




* Cut up your credit cards, unless you can pay off the balance each month.




While we live in a society in which many feel they deserve whatever they want when they want it, they are sadly mistaken. You can only save regularly if you resolve to live within your means.




Building up credit card debt on things you cannot afford is not living within your means, and you will be accruing interest rapidly. Talk about adding insult to injury.




* Create a monthly budget, with 5-10% to go into your safety net.




It is relatively simple to create an Excel worksheet that can be used to plan and track your monthly budget. List all of your expenses, with estimates for certain things like food and gasoline.




Add in a line item for your monthly expenses called "safety net." Enter a determined amount, such as the recommended 5-10% of your income.




Total your expenses, and then compare it to your income. You may find that you will need to lower your expenses to live within your means.




Here's the crucial part. Instead of lowering the amount in your safety net item, cut out other living expenses. This is how you make sacrifices to save!




Perhaps you only need basic cable versus the package with all channels. Maybe you should get a manicure and pedicure once a month instead of every other week.




Do you really need to purchase your groceries at a high-end store? Could you get some of the staple items at a discount grocer?




Scrutinize, and make some decisions. You must really want to stick to your plan, or you will not have success.




* Move planned safety net money into a savings account.




You want to put your allotted

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