When you have just started earning, you do not know much about balancing your expenses in accordance with your earning. You learn about a lot of new bills. You might not have had to pay bills before, but now you do, and there are also taxes to be done. It can all get pretty overwhelming.
Non-discretionary spending becomes a part of life. This is something that you have no choice of cutting back on to increase your savings. Whatever money you can put aside comes after you have met all of these expenses. You might not have even known the term before. You learn a lot of new financial health-related terms. You suddenly start feeling all grown up. The transition isn’t smooth for a lot of people.
My dad instilled the ideology of spending within the limits of my meager pocket money and still have some saving since I was a child. So, it was easy for me not to fall into the hand-to-mouth lifestyle.
I have since learned to have a sinking fund, in addition to an emergency fund, if I am thinking of making a big purchase down the line. Having a sinking fund helps you save up for something you need to buy or something you need to pay for, without tapping into your emergency fund.
This helps me keep my bank balance at a healthy amount. If you were to lose your job today, you should have three months’ worth of salary in your account so that you can support yourself while you get back up.
I am writing this because recently I had to explain this to my friend. He is a good-natured and helpful person, so if someone asks him for money, he won’t say no. He has been giving money to his relatives. They borrowed for the lamest of reasons. Honestly, saying no to the people in the family is always difficult.
But the problem here wasn’t giving them money; the problem was giving them money when he himself didn’t have enough. He let his bank balance go to zero, and I was so pissed because A) I advise people about managing their personal finances and B) he has watched me deal with people and C) he has to stop letting people take advantage of him.
Defining Your Own “Zero”
I explained to him that when I said I didn’t have money, I didn’t mean my balance was on zero. Honestly, I am not big on investments right now; I am more into investing in myself as I am 23 and have a lot to learn. But, there is a minimum amount I like to maintain in my account, which is a little over my two months’ salary. I again have a more minimum number for when things get tight, this is still more than my month’s salary, but I consider it as zero.
Many bank accounts will fine you if you don’t maintain the minimum balance, while many let you have zero balance. He never thought of defining his own “zero.” It made a lot of sense to him after I put it that way. After you hit a minimum that you have defined as your zero, you can’t spend more or lend money.
You need to have something for an emergency. Emergencies don’t come in announced. A huge part of being financially responsible is being ready for emergencies. Having a minimum limit to maintain makes sure that you will not be completely out of bounds if need be.