Make A Stash
So, how much money do you need to save? Again, I’m not here to dictate an amount or a percentage to you. You have to decide for yourself what your goals are, what you are willing to do, and how much and how long it’s going to take to get you there. But we can give you the tools to help you figure out how to figure it out and how to do it.
First, your goals. Are you looking for financial stability — not living beyond your means, saving a portion of each paycheck, being able to withstand a large expense or a long, drastic decrease in income, and being able to retire eventually? Or are you looking for financial independence — having enough money to live off the investments, even if you like your job and want to keep working? Are you okay with working until your 65? Or do you want to retire earlier than that? What kind of lifestyle are you looking to live when you do retire? Will you spend about the same amount of money as you do now? A bit less (no more mortgage)? A lot more (tons of traveling)?
Or maybe you’re still so buried in debt, you can’t even look that far ahead yet. I can tell you from experience, sometimes you get so far down a hole, you can’t see the way out. It’s there, and we’re here to help you find it.
So, let’s start at the beginning and work our way towards more financially sound, stable and independent.
Establish an emergency fund.
How much should you sock away? It depends on where you are in the process and what you’re expenses are.
If you’re still paying off debt, you want to squirrel away enough money to not have to charge anything to a credit card, should an unexpected expense pop up — your refrigerator breaks and you lose an entire week’s worth of food (happened to a friend of ours yesterday), or you need to bring your cat to the emergency vet, or you miss a few days of work because you’re sick and have run out of (or never had any) sick time. Our first goal was $1,000, and then we built it up to a month’s worth of bills a few dollars at a time.
If you have no debt to pay down, your emergency fund should be significantly bigger. The rule of thumb is 3–6 months of expenses, but some experts suggest up to 9 months. This is another choice you will have to make. How much of a cushion do you want to have? Bear in mind that as you progress, you should have more money saved in other areas that you can access, if the need arises. It usually takes a little time to liquidate investments, so it’s still important to have an emergency fund to access quickly, but it doesn’t need to contain 5 years worth of income. Could you build it up that high? Yes, if you wanted to. But you’d earn more putting that money to work in longer term investments*. Your emergency fund should contain enough to get you through a few months of hardship, and time, if needed, to make other arrangements with some of your less liquid assets.
If you need to spend from this account for any reason, your priority is to rebuild it back to it’s full amount, before continuing to build other investment or retirement accounts.
Kat
*The exception to this is if you are saving up for something specific, like a car or a down payment on a house. Do not put any money you plan to use within a year or so into an investment fund. Investments can fluctuate wildly (especially in the pandemic economy and/or if you put your money into riskier investments), so if you plan to spend the money in the short term, saving is better than investing.
Originally published at https://foolishtofrugal.com on July 30, 2020.
