This blog is part two of a two-part blog post! Click here to read part 1.
Step 3
Step three comes down to saving $3,500. I broke this down into four steps.
The first step is saving $500 to get you going, basically to build momentum to build you up to that thousand-dollar mark in step two. Now, the $3,500 mark is to cover those larger expenses that were unexpected. That could be a medical bill, braces for a kid, a sprinkler system for your backyard, or for a major component in your engine that went out. It\’s important to have an emergency fund of that amount to cover those expenses so that you don\’t have to go into debt and to prevent that emergency from becoming something that you can\’t continually pay for on an ongoing basis.
Step 4
Step four comes down to saving two to six months of your living expenses. Now, this really depends on how much you make and how much your lifestyle costs.
So, let\’s say you have a $65,000 gross income for your household on an annual basis. That breaks down to a $5,400 gross income per month, around $3,800 after taxes. Let\’s use $3,800 as an example and distribute it out, saying that you had:
- 10% going to giving
- 10% going to savings
- 10% going to food
- 5% going to utilities
- 25% going to rent and mortgage
- 10% going to transportation
- 25% going to healthcare and insurance
- 5% going to any recreation or personal expenses, incidentals, or miscellaneous expenses
You could assume that when you have a medical emergency, have to step away from work, have a layoff, or are let go for some other reason, you won\’t be putting money into savings. Likewise, you will most likely not be able to give because you won\’t have the income to do so.
Taking these two aspects out (about 20% of your income) leaves 80% that would need to be covered through an emergency fund. If you had about $3,400 in expenses, you will want to extrapolate that out over the two to six months to give you the amount you should be saving.
Now that you have calculated how much you need on a monthly basis to cover your expenses to maintain the same level of quality of life, it\’s important to ask yourself:
- How much would you need to have saved?
- How many months could you go in the event of a layoff, furlough, etc.?
You need to look at your savings and be able to say, \”okay, do I have insufficient savings because I have no savings? Do I have 500 dollars in savings? Do I have 1,000 dollars in savings? Do I have one month of living expenses? Do I have two to six months or more?\”
It\’s important for you to look at how much you have saved so that you can adjust your plan to spend depending on how much you need to build up in savings.
Now with that, this is an emergency fund. Its purpose is to be there to protect the ground that you\’ve gained––to maintain that level of lifestyle that you have built thus far. Therefore, you\’re not looking to put it into anything that would necessarily have great returns because that will come with higher risk. But it\’s vital for you to look at and evaluate how much you have in savings now. Based on the following benchmark––whether it\’s 500 dollars, 1,000 dollars, or so on and so forth––calculate how much money you are away from that next benchmark. Figure out how you can adjust your budget or your plan to spend so that you can be sure that you\’re putting away money in order to hit that next benchmark.
Once you hit that six months of savings, you have a pretty good cushion.
However, this doesn\’t mean that you won\’t have an expense that will come up that surpasses this amount or that there won\’t be a layoff that causes you to use up your savings over a certain number of months while you\’re trying to find the right job. It doesn\’t mean that you are necessarily fully protected. But it\’s a really good start to protect you from life and from going without an income and having it disrupt your world significantly. Once you hit that six-month mark, you\’re welcome to save beyond that. But you\’ll also have to look at how much risk you have, such as the likelihood of you losing your job and how it would impact your family based on your lifestyle.
So sit down and look through these figures to determine how much you have saved. Determine if you have savings and develop a strategic plan to build out these four steps to protect yourself and your family from unnecessary risk.
