When you first start budgeting, paying off debt, or attacking a huge money goal, it could feel as though you’re trying to do so much at once. Sort of like being in a sinking ship and trying to take out the water in bucket fulls. Stop.
Before you start paying off debt, saving money, or investing in the stock market let’s take a look at your emergency fund. On average the rule of thumb is that you should have 3-6 Months worth of living expenses stashed away for a rainy day. I’d like to go even further and have you ask yourself these four questions to help you decide how much you should have put away:
Now, grab another sheet of paper and begin jotting down your essential expenses. Essential expenses will be mortgage/rent, utilities, internet, cell phone, etc. Anything that is essential in your life during emergency mode will be listed here.
Now let’s figure out how many months you need to have stashed away.
Tally up the answers above, in parenthesis you’ll find a number system.
In this example I’ll be assuming a role of a nurse with monthly living expenses of $1,500 a month during survival mode.
But now let’s add in question #4 into the equation. The amount that automatically gave me peace of mind was $6,000 so I can choose to either change the e-fund goal amount to $6,000 or take the average of the two numbers to find a sweet spot!
In this example I’m gonna do the latter so
Now Divide $10,500 by two = $5,250 is what I should have set as the goal of my emergency fund + what gives me peace of mind (the sweet spot).
How many months is that ? $5,250 divided by your monthly expenses $1,500 = 3.5 months stashed away for a rainy day.
Now that you know how much you need to stash away for a rainy day, ask yourself how long you want it to take you. If you want to achieve this within 6 months, simply divide the total number by 6 and include the monthly amount in your budget.
This is one of the most important steps in your money journey, especially when you’re gonna focus on paying off debt and saving for a big goal. You don’t want any distractions or hiccups that will throw you off course!
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