Step 5
Savings
Savings are aptly named– they can swoop in and save you in times of need. Savings can be the difference between stumbling into debt or finding your way closer to retirement. Savings are a crucial step towards financial independence. We'll start with the first kind of savings you need to establish now: an Emergency Fund!
Emergency Funds
Emergency funds are funds you save for, you guessed it, emergencies. People aim to save between three to six months of expenses (or more if necessary) to prepare for unforeseen events like your car breaking down, losing your job, or other annoying, terrible things.
To figure out how much you need to save in an emergency fund, calculate your monthly expenses. Remember the budget you built in Step 4? You can take the numbers from that calculation, or you can add up all your recurring, monthly expenses (rent, insurance, electricity, gas, water, etc.).
Next, you'll want to multiply your monthly expense by 3. This will give you a number that represents how much money you'd need for 3 months of total living expenses. This is a great goal to build your emergency fund up to at first, and you can always add more to have peace of mind for more months.
The emergency fund acts as a crucial savings account so that if something does happen, you won't have to rely on family, friends, or dreaded credit card debt, to help you out in a pinch.
I highly recommend keeping this emergency fund in a High Yield Savings Account, which you've probably heard of before. I'll cover that in the next chapter.
If you have high interest debt (like credit cards at 24% APR), it may benefit you to try to pay those loans off first, although some advisors like Dave Ramsey recommend building up an emergency fund to around $1000, and then working on chipping away at those loans as soon as possible.
Now let's talk about where to store your new emergency fund!