Pamela Yellen, a savings expert and author of the New York Times bestseller, "Bank On Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future," knows firsthand that a bad financial crisis can happen to good people.
Yellen and her husband, Larry, lost money investing the traditional way, then they got stuck with $15,000 of medical bills their health insurance didn't cover when Larry had emergency quadruple heart bypass surgery. That's when they discovered that, according to one widely quoted study , medical costs were a contributing factor in 6 out of 10 bankruptcies, even though 75 percent of these people had health insurance.
Luckily, Yellen and her husband were " financially fit " enough to survive that financial crisis. The experience spurred her to educate consumers on how they can also be prepared should they have to face a similar financial disaster.
CreditCards.com: What is your definition of being financially fit?
Pamela Yellen: Financial fitness is about having financial predictability and security. Of course, it's also having your spending habits under control.
CreditCards.com: What is the best way to achieve overall financial predictability?
Yellen: I advocate the 10/10/10 savings formula that's derived from the savings habits of the 1940s and 1950s when people actually had a lot more financial security. That means setting aside 10 percent for short-term financial goals, such as vacations or holiday gift giving, 10 percent for mid-term needs and potential emergencies, such as a new car, replacing a major appliance or a new roof, and the final 10 percent for long-term retirement. That's really what it takes to be financially fit now and to avoid debt in the present while still saving for retirement so you can be comfortable in the future. The 10/10/10 method helps you better predict your financial future
CreditCards.com: So how can a person ensure they have enough set aside for a financial emergency?
Yellen: Financially fit also means having a significant rainy day fund . Many experts say you should have two to six months' worth of household expenses saved. The problem with that is not only might that not be enough, you could be tempted to stop saving if you hit that number. That's why continually saving 10/10/10 is wise.
CreditCards.com: Does that mean you shouldn't focus on having a certain number of months' worth of expenses saved?
Yellen: No, not at all. That means you need to keep saving and save more than you may have thought you need.
Multiple surveys say that the average person doesn't even have three months of household expenses saved. And recent stats show 70 percent of all workers would have trouble meeting current financial obligations if their paycheck was delayed by even one week.
My definition of a good level of fitness is having at least one year of household expenses saved, and that savings should be in safe and liquid place in case you need to fall back on it in an emergency. That's not money locked up in an IRA or stocks. You have no business being in the stock market if you don't have at least one year of savings in the bank as that's a recipe for financial stress.
CreditCards.com: What role do you see self-control playing in a person's financial stability?
Yellen: It plays a big role. If you give into every impulse you have, there will be financial chaos. But having self-control doesn't have to be painful, and that type of financial literacy is what I'm trying to teach people.
Financial fitness is not about deprivation, it's about awareness. A lot of studies have said that you spend more money when you use a credit card than if you use cash or pay by check. But a little known fact is most debit cards that bear the credit card logo also trick you into spending more. The logo gets into your head and you behave as if the card is a credit card; you spend more without thinking of the consequences.
CreditCards.com: Does conscious spending include being on a budget?
Yellen: I do not like to use the word " budget " -- it's a six-letter word. Budgets are like diets; neither one is fun. I prefer the term "strategic spending plan" and that can be a lot of fun.
The first -- and most important step -- to develop your strategic spending plan is knowing where money goes each month. Achieving that can be done by simply listing your income on one side of a piece of paper and expenses on another or using financial software, smartphone apps, etc. It doesn't matter how you do it, just as long s you track your spending so you can easily identify where you're wasting money that you could redirect toward reducing debt or increasing savings.
CreditCards.com: What tips do you have for couples who fight about money and what do they need to do to create financial harmony in their relationship?
Yellen: A great strategy is having a monthly family financial discussion night. And get the kids involved, too, so you can teach them how to set a spending plan as early as possible.
During the discussion, go over everyone's spending and savings plan. Look at everything you all have bought during the past month or are thinking of buying or spending money on and create family personal spending rules to achieve your goals. For instance, maybe you all have to brown bag it for lunch to prepare for a family long weekend out of town.
Make sure you include short-term and long-term goals as a family. Then create rules that are in sync with those goals so you can make spending decisions that make you happy today and tomorrow.
See related: Cash emergency? Consider tapping life insurance policy instead , Alternate strategies to saving for emergency funds , Building a better envelope budgeting system