If you lost your job today, would you have enough cash on hand to pay for your living expenses until you find a new job? What if finding a new job took six months – would you have enough cash to survive?
If the answer to these questions is no, then you need to start building an emergency fund…today!
How Much You Need for an Emergency Fund
Dave Ramsey, a popular financial expert, recommends people have at least $1,000 in savings while paying off high-interest debt. This includes credit cards, loans, etc. with at least an 8% interest rate.
Once high-interest debt is paid off, you should start to use the money you were using for debt as savings for your emergency fund. Everyone should have at least three months’ worth of savings, but it’s better to have six months.
Calculate all of the money you need to pay for your mortgage/rent, utilities, gas, food, and other necessities. Add in extra money for some of the things you don’t necessarily need to survive but that would be essential to your sanity – such as paying your gym membership or going out to dinner once a week or month.
Once you have calculated your average monthly spending, multiply it by three or six, and that would be how much you need to save.
For example, if you have a $1,000 mortgage, pay $700 for bills, and need another $1,000 for food, gas, and other expenses, you would need at least $2,700 a month to survive. If you round that up to $3,000 (it’s always better to be safe than sorry), you would need $9,000 in an emergency fund for three months or $18,000 for six months.
Don’t feel overwhelmed by the figure. You can do this as long as you work towards it.
Working Towards Savings
When we say “work towards it,” that may mean you need to find a second job temporarily. You could also just cut back on some of the things you purchase now. Do you really need that $5 Starbucks coffee every day? Do you need to go shopping for clothing every week? Cut back on your spending, and you’ll start to see how much money you can save.
Another option is to boost your withholdings so you don’t get such a high return every year. By decreasing the amount of taxes the IRS takes out of every paycheck, you’ll end up having extra money to put away in savings. Just be careful you don’t withhold too much, or you’ll end up having to pay the IRS.
Join Wealth Daily today for FREE. We”ll keep you on top of all the hottest investment ideas before they hit Wall Street. Become a member today, and get our latest free report: “The Next Gold Rush: Three Easy Gold Investments fo 2020”
It contains full details on something incredibly important that”s unfolding and affecting how gold is classified as an investment..
After getting your report, you’ll begin receiving the Wealth Daily e-Letter, delivered to your inbox daily.
Making Money from Your Savings
As you are saving, you can make money from it. You’ll need to transfer your money to an account with a higher interest rate. Some people choose to open a money market account, while others invest their money in a CD ladder.
A money market account is just like a savings account in that you can deposit and withdraw money whenever you want. It just has a higher interest rate than a regular savings account.
A CD ladder is when you buy a six-month CD every month for six months. On the seventh month, your first six month CD will mature, and then you can roll it into another six month CD. If you lost your job, you would have a CD mature every month for six months, which would be like having a monthly income.
As you’re looking for vehicles in which to invest your savings, don’t ever choose anything with withdrawal fees. These fees can be pretty high, and that will cut down on the amount you’ll have to survive. With CD ladders, you will have to pay if you take money out before it matures, but since you have one CD maturing every month, you shouldn’t have to break a CD. Just make sure you have enough in each CD to cover living expenses for a month.
Don’t ever put your emergency fund in a risky investment to make money. Your emergency fund has to be accessible to you at a moment’s notice. You can’t afford to invest it in vehicle that may cause you to lose the money or that will lock it away for a lengthy amount of time.
Once you have your six months of emergency money, you can start building money for investments. That’s the smart way to handle your finances. This way, you will have the money you need in case of an emergency, and you can increase your wealth with money that you won’t need if you lose your job.
If you liked this article, you may also enjoy:
