Managing your finances can be difficult, but a few quality tips and tricks can go a long way. Each week we'll be featuring a new tip on anything from daily spending to retirement planning from a member of the Finance Collective. This week's tip comes from Investment Conversations and is great advice on how to prepare yourself for unexpected expenses, along with tips for setting up your emergency fund:
"Emergency savings, Rainy day fund, Safety net – whatever you choose to call it – are a necessity for a healthy life; not just financially, but also mentally. With this in mind, it is surprising that about 60% of individuals do not have savings to cover a $500 (or equivalent) emergency (You may say, "Not me", but I'm not talking about the stash under you mattress or in that shoe-box). On the other hand, as a result of reaching adult age during the sub-prime mortgage crisis, more millennials are saving and or investing compared to previous generations. Good as that may be, we are skipping the essential step of setting up for emergencies.
How Do I Start?
There is no fixed formula for how much you should have in an emergency fund. Some school of thoughts say 6 months' worth is sufficient, some say a year's worth. Everyone's situation is different and as such, each strategy should differ. To start however, I would suggest understanding your spending habits, and then implementing a 3-6-9 guideline.
3 Months: If you are single without kids, renting, no car, partially dependent on parents for income or any combination of these factors, start off with a target of 3 months' worth of expenses for a rainy-day fund.
6 Months: Married, kids under 18, own a house or condo, own at least one car, or any of these combined, the base target should be 6 months' worth of expenses (if married, base it off the income of the highest earner).
9 months: Self-employed, freelancers, anyone with a volatile job or unpredictable paycheck, 9 months' worth should be the benchmark.
If you noticed, I specified the worth in terms of expenses not paycheck. This is best especially for those just starting. By understanding your spending and calculating your basic expenses, you can have a general idea of how much to put into this fund. If you decide to determine the monthly worth in terms of paychecks, kudos to you. Key to this however, is to start out with small monthly (even better, bi-weekly) deposits till you reach your goal. If you are just starting out saving, set up this emergency fund before any long-term savings – or at the most, simultaneously. To help, make it an automatic withdrawal from your main account; think of it as a bill with the knowledge that every withdrawal from the fund has to be replaced." -Investment Conversations
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