Most people go through life living pay check to pay check. They go to work, make money, take home their pay and then pay for all their wants and needs, their bills and have nothing left in the bank until the next pay.
This goes on for months and eventually years. A recent study in Australia has found that the average person has less than $1,000 in their savings account. Only 10% of people in Australia have over $10,000 in the bank.
That means that millions of Australian’s are living pay check to pay check. If their income gets shut off, they are pretty much screwed. Not only that, most people are in credit card debt making it so hard for them to climb out.
When I was young, my dad taught me the importance of saving money. Coming from a very poor upbringing, my parents had to scrimp and save every dollar they had. It was from this upbringing, I learned the importance of saving money.
Fast forward years later, working in a low paying job, I was still able to save about 50% of my income. Despite not earning nearly as much as other high income earners were earning, I built the habit of saving money at an early age.
From there, I was able to buy my first home and travel the world. I’m definitely not saying all this to brag or anything but if you can achieve saving a home deposit, you really learn and understand how saving money works.
Since then, I’ve kept on saving money and looking for safe secure investments to park my cash. It’s a very slow process and it’s like watching grass grow but it works.
I personally think that everyone should have at least 3-6 months of emergency savings saved up. When you have emergency savings in the bank, you feel more confident, safe and ready for life’s challenges.
The One Secret To Building Your Emergency Savings
If there was one thing that really helped me learn how to build up a large sum of cash to buy my first home or emergency savings it’s this.
When the little money I had from my first low paying job, I spent it on books and education. I read all the financial books out there and if I couldn’t afford it, I would go to the bookstore and read them there. I would also go to the library and read books. I would go online and read blogs and articles.
I would always read everything there is to know about finances and how to make more money and save more money.
If it wasn’t for my financial education, I can 100% say without a doubt that I would never achieve my financial goals. No one teaches financial education in the mainstream media. I just recently read an article on how millions of Australians can’t save and they blamed it all on jobs.
This goes to show that the average person is ignorant of financial education. If hitting a savings target was dependant on a low paying job, why not take another job and increase your income? Why not reduce your expenses so you increase your cashflow? Why not build a side business to increase your income?
These are all actions that you can take without blaming a job. Once again, financial education and personal development always helps.
How To Build Your Financial Cushion
So let’s get to the meat of this article.
How do you save a large financial cushion?
By understanding cashflow and really mastering this key concept, you’ll change your financial life. The way cashflow works is this. Let’s say that your income is $1,000 per month and your expenses is $700 per month. That means you have a cashflow of $300. If your expenses is $500 per month, that means that your cashflow is $500.
Why is cashflow important? Because it makes you achieve your goals a lot faster and also protects you against unexpected expenses.
For example, let’s say your cashflow is only $10 per month. That means that in 5 months, you would only save $50. Horrific. Now let’s say that you suddenly have an outstanding bill that comes up and you need to pay for it. The bill is $500. That 5 months of savings is now gone and you’re in debt to $450.
If you put it all on a credit card, you’re now incurring debt and it kills your cashflow for the future as well because you’re paying off fees.
This is how many people get into so much financial trouble because the lack of financial education.
Importance of Cashflow
Now the trick is to always keep an eye on your cashflow. NEVER EVER LET IT DECREASE. If your cashflow is $500 per month, don’t take on more expenses that reduce your cashflow. It could be a gym membership, magazine subscriptions, buying a new car etc.
ALWAYS INCREASE YOUR CASHFLOW. Build a side business, take on a new job, reduce your expenses. Always look for ways to increase your cashflow and save more.
That’s it in a nutshell. That’s how I was able to build up emergency savings and save up for a home deposit. I know it sounds very simple but it’s always the simple things that we tend to neglect.
Take this information, learn it, master it and you’ll be truly amazed on how much your bank account grows over time.
Stay Strong and Be Relentless.