Sunday, March 24, 2013

Lesson 4: 3-6 Months in Expenses

Financial Planning for the Recent Graduate

 


When applying for a job, no one ever expects to be laid off or fired one day.  The reality is, it happens more often than not.  Plus, you’re young.  Do you plan on staying employed at your job for 40 years?  You’ll probably move to another city, state, or country in your lifetime, change careers at least once, maybe you’re planning on having kids one day, or heaven forbid, you have an life-altering medical situation.  One day, you’re going to have a period of unemployment.  During this time, you’re going to need money to keep afloat. 



I recommend saving at least 3 months, preferably 6 months of expenses in a separate savings account.  You can use the same account as your emergency fund.  This account is your safety net for when the unexpected happens.  Set aside money every month for this account.  As it builds up in value, you may have a friend, family member, or someone call you from your bank and recommend putting it in a brokerage account or investing in stocks.  DON’T DO IT.  This is your personal insurance, not an investment.  I'll say it again.  This is NOT an investment.  Yes, you could make lots of money on this account by investing it into something more financially efficient.  However, all investments have the risk of falling to $0, and it doesn’t matter how much you have invested.  

The purpose of this account is to be a liquid (easily converted to cash), accessible savings account.  There’s a huge difference in your mind and your spirit when you’re laid off with 6 months of cash protecting you and your expenses vs. having nothing.  It’s an incredibly important part of your financial plan.  It’s your financial foundation.  Before building a house, you have to pour the foundation.  The 3-6 months in expenses is the base, the foundation of your finances.   Without it, your finances will crumble one day.  You’ve got to pour, so one day you’re not poor




Once you’re out of debt, this should be a much easier step to accomplish.  Instead of paying the loan company every month, you’ll realize the incredible feeling of paying yourself first.  Don’t delay this step, and again, before you start investing, get your  3-6 months of expenses in place.  The Bible says, “Four things on earth are small, yet they are extremely wise: Ants are creatures of little strength, yet they store up their food in the summer” (Proverbs 30:24-25).  Like the ants in the summer, you’re at a season in your life when you’re employed and healthy.  Use this time to save for the seasons of your life when income is scarce, like when you are unemployed or unable to work.  

Tip 1: Find a savings/checking account that pays high interest.  That way, while you’re saving, you’ll at least earn something.  Again, make sure you’re able to transfer the money easily, in case of an emergency (usually 2-3 business days is the standard). 

Tip 2: How much do you have to save?  Calculate how much you need to save, and how long it’ll take you to get there.  This Google Doc will help with that.  Are you really allocating enough money to this savings account?  Choose to save.  How long will it take you?

Tip 3: Don’t get discouraged.  This is the longest step to complete, but it’s more than worth it.   

Tip 4: Remember the steps, and do them in order!  
#1: Get on a budget.  
#2: Save $1,000 for an emergency fund.  
#3: Pay off your debt with intensity, and then 
#4: 3-6 Months in expenses.  

Have you ever seen someone eating while driving, sipping a soda, and texting/talking on the phone?  You probably saw that same car a few miles down wrecked on the side of the road (or pulled over).  Don't try to do too much at once.  It's the same way with your finances.  Stick to the plan.  Focus on one step at a time, or else you won't get anywhere.  

Questions?  Leave a comment below or email me at finance4therecentgrad@gmail.com.


Images Courtesy of freedigitalphotos.net bStuart Miles, published on 11 April 2012 Stock illustration - image ID: 10079600, bBoaz Yiftach, published on 08 September 2010 Stock photo - image ID: 10020252, and bSweetCrisis, published on 11 May 2012 Stock photo - image ID: 10082748

3 comments:

  1. This is great great advice. Sometimes people think they can work forever an not bother save up. Hoping to read more from you Eric.

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  2. Thanks, Edward!

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  3. Just started reading your blog from the beginning and this is great advice. Super excited that you have put this together. Thank you!!

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Thank you for your comment. I look forward to helping you.