Do you know how big your Emergency Fund should be? You guessed it right: the size of 3+ months worth of your expenses. Or the equivalent of the unemployment rate (say, 8% unemployment means that you should have enough dough to last for 8 months) - however you look at it. But have you ever wondered: what’s the maximum allowed size of your Emergency Fund? The correct answer is 9-10 months worth of your expenses (excluding savings for financial goals). If you’re truly committed - saving even more might be a good idea, but it might as well be harmful.

Before we proceed with explanations, can you answer a simple question? How can an average Joe save up money enough for him to last for, say, 6 months? What kind of motivation drives his determination to save money rather than buy the latest plazma TV or an iPhone or a new car? Buying clothes when needed rather than a new Macy’s (David Jones, etc) catalog arrives in the mail? Staying home for holiday rather than going to Mexico/Hawaii/Fiji/you name it?

The keyword is “FEAR“. Fear of losing a job and inability to find a new one. Fear of not having enough money to pay for an emergency (from a car breakdown to an emergency hospital visit), fear of foreclosure of a recently purchased family house. Meet the economics of fear - something convincing you to spend money on various products, starting with common financial products like mortgage repayment protection to a gun in the pocket to protect you from criminals. However, the savings aspect of the economics of fear is a bit more tricky since it doesn’t force you to buy anything (except, probably for life insurance and income protection which, in my opinion, is a must-have), but does require certain changes in life priorities and expense structure.

We, Weekly Envelope users, are not fanatical supporters of the ’save yourself rich’ idea and strongly believe that scrupulous expense tracking harms you more than cures. Looks like it’s time for a piece of advice:

if you save more than necessary for a ‘rainy day’ - it has already occurred to you.

Take our word: your Emergency Fund is not the only type of financial goal you can have. There’s a huge chance that you need to save for a new car/home renovation/college for kids/your own retirement. Move the excess money to any of your financial goals. If you’ve already got everything arranged (our congratulations to you!) - give yourself a break and go on holiday somewhere or spend money on yourself by other means (ex: resort to retail therapy). Or donate the excess money to charity or to your church.

And don’t forget to tell your friends and family about the Weekly Envelope family budgeting service, which helps you without sending you on a guilt trip.

Our friends from MoneyEstate compiled a concise yet useful list of five common budgeting mistakes. It’s truly amazing to watch people with college degrees and lots of life experience literally be clueless about budgeting (and we’re not talking about such advanced concepts like financial modeling or calculating investment risks!). Good news is that when we developed the Weekly Envelope online budgeting system, we incorporated means for users to get ready for the unexpected and to follow all Personal Finance Commandments. Let’s have a look at the list of mistakes compiled by MoneyEstate:

1. Not writing down and defining your budget. You won’t believe how conveniently flexible you are when it comes to defining a budget and sticking to it if it all happens in your head. Depending on circumstances, you can think that your weekly budget might be $300 - when in reality it’s half that. Where does the surplus money come from? Well, your cash reserves or (unfortunately, much more often) credit card debt. Weekly Envelope system gives you an exact figure how much you can spend a week in order to spend less than you earn and to save for your goals. If you spend more - you’ll see the impact of excessive spending immediately.
2. Non planning for surprise or one-time expenses. From our experience, an average person saves less than 50% of the planned amount because of unexpected expenses (car breakdown, child expenses, social events, etc). The solution? Most “unexpected” expenses are in fact known in advance and are predictable. Day Care center for your kids? Totally expected. Car broke down? Unless it’s a major repair (in which case it might be a good idea to dispose of a car altogether), you could’ve saved up for the repair: after all, you knew that it was just a matter of time, didn’t you? Weekly Envelope system allows you to specify your expenses in advance and save up for special occasions. You will be surprised to see that most your “unexpected” expenses are in fact recurring and can easily be planned.
3. Not budgeting for contributions to an emergency fund. This is the most basic rule of personal finance: no matter what - emergency fund is something that you must religiously build up. 20% is the best, 10% is OK, but even 5% is better than nil. Don’t expect to get a salary raise or a fat bonus (especially in the current economic climate): start with things you can actually change. Weekly Envelope system suggests you to save a certain amount of money on a regular basis and informs you about the optimal size of your emergency fund.
4. Not changing the budget. If you don’t correct your budget from time to time, you risk forgetting about regular expenses or about changed income structure or about additional financial obligations or … well, you name it. The result? It’s always spending more than you earn and steadily heading toward debt. It’s a good idea to look carefully at your budget every month or so. The best part? Weekly Envelope does it for you and adjusts your budget based on the planned expenses.
5. Leaving income for spending without budgeting. Let’s face it: the day you deposit your paycheck is probably the happiest day of the month/fortnight. And it’s so tempting to spend just this little bit on something you’ve always wanted. Just one little purchase… or maybe two. Spending without budgeting gets you in financial troubles faster than anything else. That’s why it’s extremely important to use a reliable method or tool to help you with budgeting. What might this tool be? Well, you guessed correctly: Weekly Envelope personal finance system.

Don’t leave your life to chance. Taking control over your budget and spending is really easy if instead of stressing yourself with details you look at the big picture first. Good luck!