Everyone has different financial goals in life. Some people want to own their own business; others dream of retiring early. But there is one financial goal that everyone should have: a way to handle emergencies. The most prudent way is to have a liquid reserve equal to at least six months of your living expenses.
That may seem like a lot, but, needless to say, it’s very important. If something were to happen to you or your spouse, if you were to lose your job or one of your family members were to become seriously ill, how would you handle it? Studies indicate that most people would be completely broke within ninety days. Even more alarming is the fact that many would be in dire financial straits within two pay periods. Insurance is important, but it doesn’t cover everything; the day-to-day expenses of food, utilities, and gasoline to and from the doctor’s office.
So, how do you save a six month’s cash reserve? First, in order to make it easier, you must change your attitude toward saving. You must realize that saving money is essential, to both your short-and long-term financial goals. You must move saving money up on your list of priorities. Yes, all the way up to the top. Think of it as paying yourself first. Consider it an obligation, a bill, just like your mortgage or car note or credit card payment. Get it out of your regular pool of funds by depositing it into a separate savings account or market fund that you’ve earmarked for emergencies. That way, you won’t be tempted to touch it if things get a little tight from time to time.
One efficient way to do this is to set up a plan to pay yourself automatically. Simply decide where you want to put the money. This can be a savings account, money market account or mutual fund, as long as it’s liquid; i.e. you can get to it quickly if you need it without any penalties. Make sure that it pays compound interest, however. It will help you save that much more quickly. Tell the financial institution or mutual fund company that you want to set up an automatic investment plan. Under such an arrangement, the financial institution will automatically deduct the amount you specify from your regular bank account or paycheck and deposit into your savings fund.
You can set up the plan so that the money is withdrawn weekly or biweekly, monthly, quarterly or whenever you choose. And many financial institutions allow you to invest as little as $25 or $50 a month. If you’re using a savings account as your emergency fund, you can generally deposit as much or as little as you like. The beauty of this approach is that you don’t have to make the decision or effort to save every month. It’s all done for you. It forces you to save because you have no choice. You have to act to stop saving, not to start.
Once you’ve established your emergency fund, don’t stop saving. You now have a cash reserve to fall back on in emergencies, but you should continue to build your financial position by formulating a long-term investment strategy. After all, you’re already used to a certain amount being deposited into savings; it’s likely that you’ve grown to the point where those regular withdrawals aren’t even missed. Develop and implement a long-term investment strategy. You’ll be that much closer on journey toward your financial goals.