Don't forget about the rainy day

Posted by Maneesh Sethi :: August 21, 2007 @ 12:08 pm

You'd be surprised how often smart people make bad credit decisions. Some of the most intelligent students at the best universities end up deep in credit card debt before they've even finished college—my brother even mentioned that some of the people he knows with the biggest debt were economics majors at top-tier schools.

Unfortunately, no matter how smart people are, they can always sink into a web of debt. Why? Some don't plan their spending well, some don't budget, and others think that they will easily be able to pay their bills later.

The saddest reason is that sometimes some people simply need the money.

A medical emergency, a hurricane, or other urgent situation can strike at any time, leaving victims in a precarious situation. If they take a loan, they will be in a tough financial situation. The ramifications are even worse, however, if they don't take a loan. For people already in debt, this can be the end of any chance of ever paying off their other obligations, especially if they are forced to take a high-interest loan.

For this reason, it's extremely important to have a decent chunk of money stored up. Take a few minutes and think about it---if your house and job vanished, would you be able to survive? Would you have enough money to last?

You should try to set savings goals such that you have at least a few months’ pay on hand. This money should be liquid enough that you can get to it quickly. I don't recommend the “under the mattress” approach --- putting your money in a high-interest savings account is a good way to earn decent returns.

Nowadays several banks pay interest rates above inflation, so you are making money by not spending it. You can also start making person-to-person loans on Lending Club, where the rates are even higher, and then put a share of the proceeds into this account each month.

Regardless of how you save your money, be sure that in case of an emergency, you won't have to risk your entire future to do what's necessary in the present.