So you may be reading our past articles and realize that this whole financial independence idea is starting to sound pretty good. You are ready to embark on a path towards having the freedom to do what you want when you want to, but are still confused as to where to start. The investment side of money, as I have mentioned, can be complicated, intimidating, and downright scary to some, and this will be covered more in the next article.
Right now, what I want to do is give you a roadmap on how to start saving and investing your money so that it will begin to work for you. Warren Buffett, one of the wealthiest men in the world says it best, “If you don’t find a way to make money while you sleep, you will work until you die.” What Buffett is referencing is that you need to have investments which will begin to earn you interest. This interest then starts to compound, earning you even more money, and it’s all done with little to no effort on your part. My goal is to get you to the point where your making money while you sleep. But this starts with having an emergency fund to cover those unexpected expenses as the first step.
Emergency funds are a very controversial topic in the finance world.
You will hear some experts saying you should save 8 months worth of expenses, or at least $20,000, or some may even say as little as $1,000. So how do we determine what is a good amount for our own personal situations? Well thats the thing, everyone’s personal situation is a little different so it’s hard to say exactly how much money you need. I’ve come to the conclusion that generally, the best idea is to have a safety cushion of about $3,000-$5,000 in cash that is immediately accessible. This means that it is in a checking or savings account at your bank or if you prefer, it can be in a safe and secure place within your home.
Now I pick the range of $3,000-$5,000 because this generally will cover any type of immediate emergencies you may have. Your car may break down, your roof may begin to leak, or some other unexpected expense may come up and this should more than cover it. Also If you leave too much money in this account like lets say $20,000, your losing the opportunity to earn interest on that approximately $15,000 that you would otherwise have invested.
If your thinking that $3,000-$5000 isn’t enough, another option you may consider is having a credit card on hand. If you have the discipline to refrain from using your credit card and building up a balance, it can be a great tool for an emergency. My current credit card has a limit of $9,000 which offers me the opportunity to cover the cost of an emergency up to that amount and then have a month to pay it back. Also once your investment portfolio begins to grow, this will also be a last resort as a way to cover an unexpected expense if you really need it.
So I strongly urge you to consider this step. Creating an emergency fund will give you a little wiggle room and the peace of mind that if something were to go wrong, you will be prepared to handle it financially. Trust me, you will not regret it. It will bring you one step closer to being able to invest your money and start to see your net worth grow!
Just as a disclaimer, this amount isn’t necessary for all. Your situation may require that you have a little more or less saved up in cash for unexpected emergencies. If you have any questions about this or your current financial situation feel free to leave a comment or send an email and I will do my best to help you in any way I can.