The ultimate mark of a financially independent person is somebody who doesn’t need a job to maintain their lifestyle. Instead, they can rely on their savings and investments to see them through until things pick up.
Not all people are in this envious position. Instead, they have to rely on things like emergency funds to see them through when things go wrong – which they inevitably will. In fact, most people who have emergency funds report how grateful they are for them when the time inevitably comes for the money to be used.
Unfortunately, a recent survey reported by Investopedia found that nearly 28 percent of people had no emergency savings whatsoever, and were instead reliant on their next paycheck to pay their bills. More scary perhaps are the statistics among young people. In the age group 18 to 44, almost 49 percent of people have no savings for a rainy day.
It turns out, however, that personal savings aren’t just good from a financial perspective: they’re also good for personal happiness. You never know, as an individual, when you might have to approach a personal injury lawyer and can no longer work. And so having a financial cushion is not only a good for building wealth, but it’s also a great safety blanket.
Figure Out How Much You Should Save
Most banks and building societies recommend that people put away around three months worth of salary so that they can make it through tough times. This way, if you do lose your job or you get injured at work, you’ve got plenty of time to get better and find somewhere else to work.
It should be noted however that three months is just a rough guide. Tally up your living expenses and work out how long both you and your dependents could survive if your income suddenly stopped. Be careful to include all major expenses, including utility bills, mortgage repayments, and groceries.
Work Out When To Use Your Emergency Fund
A second step when it comes to your emergency fund is to figure out when an acceptable time to use it is. Some people might think that paying for a vacation is a good use of emergency funds, but most wouldn’t. Instead, emergency funds should only be used for when there are interruptions in your income. Everything else, including unexpected bills, should be absorbed by your paycheck. The reason for this is to avoid so-called “financial creep” where dipping into your savings becomes acceptable for an ever-widening range of expenses.
Paying Down Debts And Saving At The Same Time
Many people think that it is best to pay down debts first, before building up emergency savings, but this isn’t the only policy that can be effective. Another popular policy is to do both at the same time. Experts on Investopedia say that it is possible to strike a balanced approach, paying down debts while you’ve got an income, as well as building up savings. Even if you’re only putting away a few dollars a month, it’s the beginnings of a financial habit that will help you enormously in the long term.