Build Your Safety Net

I spent a good deal of time reading up on finances a few years ago. I was trying to figure out why it seemed that the more I earned, the more in debt I got and I never found my bank account growing. I read several books such as The Wealthy Barber and One Up on Wall Street. I also subscribed to Money Sense Magazine for a few years and read the blog Canadian Capitalist. Over time I developed what I would call my own personal philosophy on money.

Before I got all worked up over RRSP’s and TFSA’s I needed to build a financial safety net that I could use “right now”! In order to accomplish this I focussed on the following principles:

1. Pay yourself first (The Wealthy Barber): Put 10% of your pretax income away. I set up an account in another bank to which I directed an automatic withdrawal on payday of about $400. This is straight cash. This is the money that I use to buy things, pay for trips, and became the foundation for the next steps.
2. Build up a $1000 emergency fund (Dave Ramsey’ Baby Steps): By putting away $800 a month I was easily able to get $1000 stashed away for emergencies such as car repairs, home repairs etc. I have noticed that most of these types of emergencies seem to come in at about $1000. By having this cash on hand it prevents your from having to go to the credit card or line of credit. If you use it, build it up to $1000 again before you do anything else.
3. Pay off debt using the Debt Snowball method (Dave Ramsey’ Baby Steps): You should pay off all your debts beginning with the lowest one. For example: Say you have 2 credit cards. One is at $500, the other is at $2000. Pay off the $500 first, make the minimum payment on the $2000. It is quick and leaves you with an immediate feeling of accomplishment. Then take that money you were applying toward the $500 and start working on the $2000. I found the main reason that I kept falling behind was because A). I didn’t have an emergency fund, so my line of credit or credit card was my emergency fund and B). I would pay off my credit cards etc. so aggressively that I did not have spare cash and once again had to fall back on my line of credit when an emergency arose.
4. Build up 3 months worth of living expenses: If you were to lose your job or had to miss work due to sickness etc you need some money socked away or you will immediately be living off your line of credit and credit cards. Many experts recommend putting away 3-6 months worth of living expenses to cover the bills until you get back on your feet. Start small! Get 3 months built up and then worry about the 6. Keep this as easily accessible cash. Don’t be risking it on fancy high rate return products. Money locked away in an RRSP is not going to help you and its going to cost you big time to get at it!

There are many advisors and experts that will tell you how you need to max out your RRSP, put away money for your kid’s education, or open a tax free savings account. These are all valid points. I have laid out what got me out of debt and helped me start putting money in the bank within a couple of years. I am debt free apart from my mortgage. I put away more than 10% now. I contribute to my employer’s pension plan and I have opted in to our company stock purchase plan a few times, but I have always put away that $400 every payday. It is only after I had built my safety net that I even started thinking about RRSP’s, TFSA’s, RESP’s and so on.

If you only read one book on personal finance in your life make sure it is The Wealthy Barber by David Chilton.

Don’t get fooled by the hype! Get the basics in order before you start worrying about the fancy stuff!

*NOTE: DaveFromGP is no financial expert. He lost money like everyone else in every major market correction. He is not rich and he is purely relaying his personal experience.