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3–6 months is good, but 1 year is better
Emergency funds prevent you from overusing credit cards and dealing with financial anxiety; they also help you avoid rushing into creating another income stream or rushing into a job you don’t like. Emergency funds grant you time to think.
If more people had emergency funds, we would notice a decrease in dependence on credit cards, personal loans, payday and title loans, and financial panic, such as when COVID-19 struck the globe.
It took me about one year to build my emergency fund, so it didn’t happen overnight. Here’s what I did to accomplish that:
1. Slash My Costs- Extreme Measures
At one point, I was only paying $300 in rent. Where did the rest of my pay go? To savings and investments. I focused solely on building out my emergency fund and investing.
I wasn’t spending my money on anything outside of occasional dining out. My expenses were severely low, I didn’t have a car payment, and I only paid minimum payments on my student loans.
2. Income – Consistently Increase
Never in my life have I desired to maintain the same income levels. It’s all about consistent elevation.
The more income you have coming in, and the more extreme you can slash your cost of living, the better your financial outcome can be.
Imagine constantly increasing your income while simultaneously constantly decreasing your expenses. The outcome is inevitable; you’re putting yourself in a perfect financial spot – a comfortable one.
There are multiple ways to increase your income that don’t require a raise from your boss:
Investing
Passive income streams
Other entrepreneurial ventures
3. Discipline
Nobody likes to chat about this one too much, but when it comes to saving a large amount of money, self-discipline is vital.
If you don’t have self-discipline, you won’t have any savings.
Unsurprisingly, most people don’t have $500 worth of savings in the bank.
Since this is true, imagine the self-discipline required to save one year’s worth of emergency funds.
The process isn’t for the weak, but if you’re focused, you can get there.
4. Automation
Make the savings automatic.
Determine the amount required to save 12 months’ worth of expenses and divide it by 12. This is the money you will need to save to meet your goal.
I highly recommend splitting your emergency fund up into different accounts.
Some of the money can be put into a regular savings account, so you can always access liquid cash-however, the larger your stash of cash, the larger the need to diversify, so you’re money isn’t sitting idle not working on your behalf.
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.