Protecting Money & Managing Risk: When You Realistically Earn Enough to Save (19th Blog Post)

The total amount of income we earn will naturally impact the total amount of money we spend and, alternatively, can save. What you don’t spend you can save. If as an adult you earn just enough to “pay the bills”, then saving a portion of your income simply may not be possible. However, if, when you are an adult, you do happen to earn enough money that you realistically can save a portion of it, personal finance experts commonly recommend you do so. If your personal financial goals when you become an adult involve what inevitably will be relatively large expenses (think buying a home, buying a car, helping to support a family, going away on vacations, helping fund a college education, starting a business, having a comfortable retirement, etc.), then you may need to save money in order to be able to achieve those goals. Furthermore, stuff happens in life! Financial emergencies, unexpected expenses that are not emergency-related…..these things happen in life and having the ability to tap into some savings increases one’s financial flexibility and, in turn, can help create greater financial stability in one’s life. Of course, having some savings to tap into when and as necessary can also reduce the emotional stress that goes along with unforeseen events. Regardless, though, of whether you find yourself as an adult having the ability to save money or you earn just enough to “pay the bills”, it will be important to protect your money and manage your personal financial risk. The following are some thoughts on how to do so.

Create a budget, not in your head but on paper. It is a valuable and worthwhile exercise which forces one:

Naturally, not all of the expenses we will have as adults will necessarily be month-in, month-out expenses. Some may be quarterly, some may be annually, and some may be one-off expenses. Please refer to our 6th blog post (“Budgeting & Spending: What is a Budget and Why Create One”) for ideas of how to go about budgeting for these less frequent expenses that may come up within, for example, a 12-month monthly budget.

A practical framework one can use for creating a personal or household budget is one which involves making a distinction between “wants” and “needs”. “Wants” are nice-to-haves, “needs” are must-haves. Stated differently, if you need something to survive, by definition that is a “need”, not a “want”. On the other hand, if you would like to have something or do something but don’t need to have it or do it, then by definition that is a “want”, not a “need”. “Wants” will vary by individual given that each of us has our own set of interests, goals and priorities. “Needs” may also vary among us to some degree, although there absolutely will be “needs” that are universal among us as human beings – think food and water, housing, clothes, and healthcare, for example. Please refer to our 7th and 8th blog posts (“Budgeting & Spending: A Practical Framework for Thinking About and Creating a Personal Budget”; “Budgeting & Spending: A Frame of Reference for Thinking About How Much to Budget and Spend) in which we offer a practical framework for thinking about and creating a personal / household budget as well as a frame of reference for thinking about how much to budget and spend on individual spending categories.

After creating a budget, be sure to diligently track your weekly and monthly spending and to compare at least once a month your spending against your budget. By doing so, you will be able to quickly identify whether your spending is within the budget you previously have set for yourself or is beginning to fall outside of it. The earlier you can identify problematic mismatches between what you are spending and what you have budgeted, the sooner you can course correct and bring your spending back in line with your budget. That course correction may involve a) reducing future spending on those expense items on which to date you have overspent (i.e., overspent relative to previously budgeted amounts), b) reducing future spending on other expense items to levels below your previously budgeted amounts for those expense items, c) bringing in additional income (if that is even a possibility), or some combination of the three. Spending the time to create an objective, detailed budget and to revisit it regularly as you carefully track your spending will be time well-spent. Additionally, creating a budget will force you to identify exactly what are your individual spending priorities and personal savings priorities. As adults we will have to make choices and a budget is a practical financial planning tool that we can use to hopefully make more informed financial decisions and better choices. Ultimately, having the discipline to live within your budget (which, of course, will evolve in scope and size as facts and circumstances change) is going to be one key to protecting your money and managing your personal financial risk.

Be smart in your spending.

Ø Look for price discounts and deals that can increase the purchasing power of every dollar of income you earn and spend. Take advantage of the competitive nature of industries that sell to the consumer like retail (i.e., retailers of all types, such as supermarkets, drug stores, department stores, general merchandise stores, specialty retail stores) and entertainment. The greater the competition in an industry, the less pricing power companies in that industry have and the more likely consumers can benefit through lower pricing.

Ø Take advantage of the internet, a modern innovation which has completely transformed the consumer shopping experience and not just through the advent of online shopping. Rather, through the advent of complete price transparency and ease of access to independent product and service reviews. The internet enables all of us as consumers to easily, quickly and conveniently compare and contrast prices of products and services that businesses want to sell us, as well as to easily access independent reviews of those products and services. We can all make far more educated and informed purchasing decisions as a direct result.

Ø Be strategic by taking particular advantage of windows of time when retailers and others run major sales. Think the Christmas holiday, Labor Day, Memorial Day, etc.

Ø Consider buying in bulk depending upon your needs and the product itself, as often there is a trade-off between unit volume and price per unit. In other words, some retailers will sell products in bulk at a lower price per unit than that for the exact same product sold as a single unit.

Ø Try to avoid making impulsive or rushed decisions with regard to the larger financial decisions you have to make. Instead, try to take your time before making them.

Buy insurance.

Insurance is a type of product that protects those who purchase it against a specific set of risks. It is essentially a risk-transfer vehicle by which one can transfer, from oneself to an independent third-party, financial risks associated with a particular event. Common types of personal insurance include the following:

Let’s say you need to access a doctor, a medical clinic, a hospital, or a lab such as an x-ray or MRI lab, or you need a prescription drug, a medical device or a medical procedure. Health insurance can help cover a substantial portion of such costs. On the other hand, if you do not have health insurance, you will be responsible for and expected to pay for such healthcare expenses out of your own pocket. Healthcare is incredibly expensive and, as a result, healthcare costs can add up remarkably quickly.

Let’s say the home you live in, regardless of whether you rent your home or own it, experiences water damage, fire or smoke damage, theft, vandalism, or damage to the exterior structure, for example, from a fallen tree. Renter’s and homeowner’s insurance can help cover a substantial portion of the costs to repair and/or rebuild your home if any of these terrible events occur. On the other hand, if you do not have renter’s or homeowner’s insurance, you will have to cover any repair and rebuilding expenses out of your own pocket.

Let’s again say the home you live in, regardless of whether you rent your home or own it, experiences water damage, fire or smoke damage, theft, vandalism, or damage to the exterior structure. And now let’s say that your personal belongings (e.g., clothing, consumer electronics, home appliances, jewelry, collectibles, etc.) and furniture get damaged in the process. Renter’s and homeowner’s insurance can help cover a substantial portion of the costs to replace such personal belongings if any of these terrible events occur. On the other hand, if you do not have renter’s or homeowner’s insurance, you will have to cover any such replacements costs out of your own pocket.

Let’s say you own or lease a car and you get into accident. Let’s say your car gets damaged. Or let’s say you or passengers in the car are injured as a result of the accident. Or let’s say the other person’s car gets damaged. Or let’s say the other driver or passengers in the other driver’s vehicle are injured as a result of the accident. Or let’s say the accident involves injuring someone who is not in a vehicle at the time of the accident. Or let’s say the accident involves damaging someone’s else property besides their car (e.g., their home, their front yard, a building, etc.). Auto insurance can help cover a substantial portion of the costs associated with a car accident. On the other hand, if you do not have auto insurance, you would be responsible for covering such costs out of your own pocket.

Finally, let’s say you are married or have a child, you financially support your spouse and/or child, and then suddenly a tragic event occurs and you pass away. Obviously, in such instances, families can, among other outcomes, experience a loss of income and a loss of financial security. Life insurance can help plug that hole through paying out to your family a specific sum of money, in turn helping to ensure their future financial security despite your passing. Again, if you do not have life insurance and something bad happens to you, then you put the financial security of your loved ones at increased risk.

In some cases, you will use the insurance you buy. In other cases, you may never actually use the insurance you buy. Naturally, it is fair to wonder why one should buy insurance to protect oneself against a risk that may never end up happening in the first place or, at the very least, has a low probability of happening. That is an entirely fair question. The short answer is, things happen in life. Unforeseen events occur. Low probability events occur. Buying insurance is a form of risk management. When you need it and you have it, you are incredibly thankful you have it. When you need it but don’t have it, the outcome can be bad, really bad, even potentially disastrous. At the end of the day, insurance is a vital means of personal financial risk management, of protecting your money. Insurance can potentially protect you from incurring massive financial losses, including even from going bankrupt.

The cost of buying insurance is all over the map. It varies based on many different factors, including among others, the type of insurance you want to buy, the dollar amount of insurance coverage you want to buy to protect you and your loved ones, specific risks you want to insure against beyond the basic or standard risks that are covered in a given insurance policy, and the insurance company that “underwrites”, i.e., issues, the given insurance policy. You can buy personal insurance through individual insurance companies that actually issue the insurance policies or through what are called “mortgage brokers”. (Mortgage brokers are so called “middlemen” who offer to serve as a go-between between you the consumer and the individual insurance companies that issue the insurance policies.)

Examples of established, well-known insurance companies from whom to buy insurance include:

Save and invest for the long-term.

Financial experts tend to agree that investing is one of the best ways to grow your money over the long-term and achieve your personal financial goals.

At the beginning of this blog post we discuss why it makes sense to save money if you can. And in our 11th blog post (“Saving & Investing: Where to Put One’s Savings”), we discuss options of where to put the money that you save. One of these options is to invest your savings. Over time, an economic phenomenon called “inflation” erodes the purchasing power of one’s cash savings and will eviscerate it if one’s savings are not earning any return for a prolonged period.[1] When you take your savings and invest it, however, you give yourself the opportunity to grow your savings, to make your money work for you, to earn a return on your savings including a return that potentially can exceed the rate of inflation so that the purchasing power of your savings increases rather than decreases. Why would the purchasing power of your savings increase rather than decrease if you can earn a return on your savings that exceeds the rate of inflation? The reason is because you will grow your savings and that will give you more dollars to buy a given basket of goods and services. More dollars to purchase the same basket of goods and services whose overall price has risen less than the growth rate of your savings mean that you can buy more of those goods and services. To make this concept of increased purchasing power easier to understand, please refer to the example that we provide in our 11th blog post (“Saving & Investing: Where to Put One’s Savings”).

Investing also gives you the opportunity over the long-term to compound your money. What do we mean by “compound your money”? We mean earning a return on the returns you generate on your investment. When you invest, you give yourself an opportunity over the long-term to earn a return on the actual amount of money you invest. Through the power of compounding, though, you also give yourself an opportunity to earn a return on the returns you earn on the amount of money you invested. And, in doing so, the actual effect of compounding increases the longer you remain invested. To illustrate the power of compounding, please refer to the example that we provide in our 11th blog post (“Saving & Investing: Where to Put One’s Savings”).

Now, to be abundantly clear, investing carries with it risks including the risk of losing money. The fact is, risk is a fundamental part of investing. Please review our 13th blog post (“Saving & Investing: Investing and the Risk That Goes Along with It”) on this subject. If investing, though, carries with it risks including the risk of losing money, then you may be wondering why we are even discussing the subject of investing in a blog post that is focused on protecting money and managing personal financial risk. That is another entirely fair question. The short answer is, growing your money is a means of both protecting your money (against inflation) and managing your personal financial risk (because growing your money increases your financial flexibility, which in turn can increase your chances of successfully achieving your personal financial goals and can help you more successfully deal with the unexpected expenses that inevitably will come up in life).

Finally, if, when you become an adult, you are going to borrow money, do so responsibly and with your eyes wide open with regard to both the risks and costs of assuming debt.

Borrowing money involves serious risks. Remember that a lender expects you to compensate them for taking money that belongs to them and allowing you to temporarily use it. And a lender also expects you return to them what you have borrowed from them. To deter borrowers from failing to make interest payments when they come due and from failing to repay the money that has been lent to them, there, practically speaking, has to be a set of severe consequences that borrowers face in such scenarios. It should come as no surprise, therefore, that indeed there are. Please see our 16th blog post (“Borrowing: What are the Risks of Borrowing Money”) to learn more.

Borrowing money also is not cost-free. For the privilege that they are extending to you, that is taking money that belongs to them and allowing you to temporarily use it, lenders want to be and expect to be compensated. The fees lenders charge can come in many forms and can add up. They can cost a borrower a lot of money. Please see our 15th blog post (“Borrowing: What are the Costs of Borrowing Money“) to learn more.

The decision of whether or not to take on personal debt is a major financial decision and an enormously important one to fully think through before borrowing money. It is critically important to make as fully educated and informed a decision as possible. And, of course, if one takes on debt and it is high-cost debt (i.e., high interest rate debt) like credit card debt or a personal loan, paying it off as quickly as possible can be one of the best personal financial decisions one makes. Why? Because the interest payments one makes on outstanding debt eat into one’s consumption capacity. In other words, they eat into how much you as a consumer can spend on anything else. The higher the interest rate you are charged on the money you borrow, the more interest expense you will owe. And the more interest expense you are shelling out, the less money you have to spend on other needs and priorities that you may have.

I would love to hear from you. Any ideas, experiences, thoughts, comments and questions….please do share.

[1] Inflation is a general increase in the prices of goods and services in an economy. In the United States, inflation is typical. In other words, prices of goods and services in the United States tend, overall, to increase each year. What does that mean in practical terms for you and me as consumers and perhaps savers? It means that a dollar today is going to be worth more than a dollar a year from now, two years from now, three years from now, etc. In other words, $1.00 today will be able to buy you more than $1.00 in the future (assuming there is inflation, which there typically is). Why is that? The reason is because inflation, which occurs over time, eats away at the purchasing power of a dollar. Purchasing power is the amount of goods and services that a unit of currency, like the US dollar, can buy at any given time. As prices of goods and services rise, a fixed amount of money – like a single unit of currency or a fixed amount of savings -- can buy less. To help make these concepts of inflation and decreased purchasing power easier to understand, please refer to the example we provide in our 11th blog post (“Saving & Investing: Where to Put One’s Savings”).

Copyright © 2025 Paving Our Path, Inc. All Rights Reserved.