This is the fourth post in a (semi-)regular series about getting started in the working world. It will be tailored to my personal experience, so some parts may not completely apply to your situation. I hope it will be a good intro for young professionals just entering the working world (or a refresher for those of us who’ve been through it for a few years!).
See the other posts in this series:
It’s a good idea to have a well-funded emergency fund. You never know when you’re going to need to repair a car, fix a refrigerator, get furloughed, lose your job, etc. Your emergency fund will help you feel confident that you can get through any unexpected issue.
Traditional personal finance advice tells you to keep the equivalent of 3-6 months of take home pay in an emergency fund. I agree with this, with one clarification….
My emergency fund is only come into play when there is a true emergency. If I run into a serious financial issue (for example, get laid off), I would probably make some cuts to my monthly budget, right? For me, I’d cut cable, cut out frivolous expenses in my grocery budget, wouldn’t take so many vacations, etc. This means I only need 3-6 months of my bare bones monthly expenses, rather than 3-6 months of my current income.
So in my case, I currently spend about $1,500 per month on everything- rent, food, gas, shopping, gifts for friends and family, etc. I would probably get this closer to $1,000 if I was in a true emergency situation. Thus, I will aim to keep my emergency fund around $5,000-$6,000 (I’m aiming for the higher end of the 3-6 month recommendation).
Now that you know how much you want in your emergency fund, the next step is pretty easy. We already figured out how to transfer money straight from your paycheck to your savings account… so all you need to do is just let your money build up in your savings account. Yeah, seriously. That’s it. Let your money grow. Each month, let your money transfer automatically from paycheck to savings account, and transfer over any extra at the end of the month. Anything you can save should go straight to the savings account.
Next week, we’ll discuss what you can do with your money once your emergency fund is fully funded! (fund is funded? hi redundancy…)
Check out the next post: Investing!
Do you have an emergency fund? How many months of living expenses do you keep in it?