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Pay It Forward

A smart strategy borrowed from the Chinese

About the author

Kate Ashford is a New York-based freelance journalist who writes about personal finance and health. She has written for Money, Real Simple and Redbook magazines.

(Thinkstock)

(Thinkstock)

Quick: how much do you have saved? Is it enough money to pay for expenses if you lose your job or your home suddenly needs costly repairs? If these questions make you squirm, there are some quick and nearly painless ways to immediately boost your cash reserves, no matter where you live.

It just takes forethought and some surprisingly easy, small changes. 

First, examine the financial expectations of your culture. You may have a jump start depending on where you live, or perhaps the societal mores put you at a disadvantage.

More than a quarter of Americans have no emergency savings, according to a recent survey by US financial site Bankrate.com. Another quarter do not have enough to cover even three months of expenses. Nationally, the US saves just 3.2% of its income, according to the US Bureau of Economic Analysis. 

Australians, on the other hand, have rebounded from a negative savings rate in 2004 to one of approximately 11%, said Brett Evans, executive director of Atlas Wealth Management in Southport, Australia.

Meanwhile, India is ahead of the game. “India is a country of savers,” said Lovaii Navlakhi, founder and chief executive officer of International Money Matters, a financial planning organisation in Bangalore. “More than a 30% savings rate exists.”

China has one of the highest savings rates in the world — 54.3% in 2012, according to the International Monetary Fund. In part, this may be because China has no retirement social safety net and men are expected to own a home before they can marry.

If your savings account looks more like those in the US than in China, there are ways to beef up your reserves before a crisis. Here is how. 

What it will take: In general, financial experts suggest having three-to-six months of living expenses squirreled away for future emergencies 

In the US, it is probably more realistic to aim for three months, according to Burt Hutchinson, a financial planner in Wilmington, Delaware. “You will never get most people to six times whatever their monthly bills are,” Hutchinson said. “That is virtually impossible for most of them.”

In France, the recommendation is closer to six, according to Peter Brooke with global financial advisors Spectrum IFA Group in Valbonne, France. In China, experts advise six-to-12 months of savings.

“[That] has more to do with a conservative approach for emergencies,” said Tony Noto, a financial planner with Noto Financial Planning in Shanghai, who recommends closer to 12 months for entrepreneurs and families and six months for people on salaries with fewer responsibilities.

To figure out how much you’ll need, begin by calculating your post-tax income (that is, what you take home in your paycheque). Then, add up your average monthly expenses, subtract about 10% for belt tightening, and multiply by three to six (or more), depending on your needs.

Keep in mind that you likely won’t have as much wiggle room to trim expenses as you think. As wireless, mobile phone and other contracts become more vital to people’s ability to work and communicate, fewer expenses are considered discretionary. Plus, many families refuse to give up costs related to their children. “You are not going to give up dance or Little League,” Hutchinson said. “You are not going to change your kids’ lives.

However, if you lose your job, you can certainly relinquish dinners out and a weekly manicure.

How long you need to prepare: That depends on how much you already have in the bank, your expenses and your debt, such as payments toward a car, home or credit cards. If you have the discretionary cash to save aggressively, you could amass a reasonable cushion in a year or less. But for most people, three to six months of living expenses is a big number, so expect it to take longer.

For instance, if you make $50,000 in the US and pay 25 percent in taxes, three months of post-tax income adds up to about $9,375 — and 90% of that number is $8,438. If you start from zero and put money aside from every bi-weekly paycheque, you would have to save $325 every two weeks for a year.

Do it now: Make savings automatic. Set up a transfer from your checking account to a savings account on paydays — the idea is that if you never see the cash, you will never miss it. “Once you see your small pot growing, it will motivate you more to save,” said Gregory Meehan, a financial advisor with Montpelier Malaysia in Kuala Lumpur.

Do not link your savings account to your automated teller machine (ATM) card. “By removing your ability to access your savings easily, you will be less inclined to dip into it at moments of weakness,” Evans said.

If you must, start small to lessen the impact, transferring $100 or even $50 per paycheque to a savings account. “By starting small, you will not have the shock of trying to rebalance your budget,” Evans said.

Do it later: Every six months, assess your budget to see if you could bump up savings, particularly if you have received a bonus or a pay increase. “Once you are in the position where you are not missing the small savings, increase them another 20%,” Evans said. “And then continue this process.”

Leave your savings alone. “The reality is that people know that savings account is there, and every so often, they dig into it,” Hutchinson said. “They decided it was time to take a family vacation, or to buy that piece of furniture they want.” 

That is not to say you cannot take a vacation — but save for it, the way you are saving for an emergency.

Do it faster: The less you are spending, the more you can put into savings. Assess your budget to see if you can trim some fat and direct more money toward your emergency fund. “Track your spending with a program such as You Need a Budget (YNAB.com) or another budget tracking app,” Noto said. “People living beyond their means typically do not know where their money is going.”

Review your bills. “Sometimes we are paying more than we have to,” Evans said. “For example, review your phone or Internet account. Are you using and do you need some of the services you are paying for?” If you can tweak a bill and pay less, you can direct those savings toward your emergency fund.

Set a savings target for yourself. “This puts spending decisions in focus, and you can see progress toward your goals,” Noto said. Try a savings goal-tracking website such as SmartyPig.com in the US and Australia or BudgetPulse.com in most countries, or an app such as Saving Made Simple or Toshl Finance to keep motivation high.

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