by Terry Mitchell

Created on: February 26, 2009

The benefits of saving money are numerous. However, the most important one is that of building a financial firewall against tough economic times, such as the one we are experiencing at the present time. None of us can fully protect ourselves from all the possible bad things that could befall us. That's just a sad fact of life. However, we can build personal firewalls to greatly reduce the risk of being hit by some things and delay others for as long as possible.

The risk of financial disaster can be significantly lowered, if not averted altogether, by using the firewall of living below one's means and saving money. Unfortunately, very few people nowadays are willing to do what it takes to build this kind of firewall. Is it any wonder that the numbers of foreclosures and personal bankruptcies continue to rise?

Obviously, there are now many who are regretful that they did not opt for this kind of disciplined lifestyle. While it's now too late for some, there is still time for most of the rest of us to avert the worst consequences of a financial setback - if we are willing to change the way we live and start putting more of an emphasis on saving money.

For the sake of illustration, let's compare two people who make $60,000 each. That amounts to the nice round number of $5000 ($3750 after taxes and deductions) a month. Bob chooses to a purchase a modest home with a mortgage of $700 a month. He also puts $800 a month into his non-retirement savings. Joe, on the other hand, selects a more extravagant home with a mortgage of $1200 a month. He can only afford to save $300 each month.

If, after three years of owning his home, Bob is laid off from his job and remains unemployed for six months, he would easily have enough money, $28,800, to cover his living expenses of $17,700 ($2950 x six months). However, given that same situation, Joe would not fair nearly as well. He would have only saved $10,800, but would need $20,700 to cover his living expenses ($3450 x six months). He would run out of money in just over three months and might have to file for personal bankruptcy and/or face foreclosure.

Obviously, by living a little below our means and putting the resulting savings away for a rainy day, we can significantly reduce our chances of being faced with a financial disaster some day. Every individual and family need to take a serious look the possibility of a financial setback and start building the firewalls needed to protect themselves.

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