When times get tough like they are now for many people, one quote really encompasses who is better prepared for the sudden change:“Only when the tide goes out do you discover who’s been swimming naked”-Warren Buffett
This quote can explain both people taking on too much risk, but also a subject I want to cover which is a proper emergency fund. According to a Charles Schwab survey, 59% of U.S. adults say they live paycheck to paycheck- and furthermore only 38% of people have an emergency fund. Having some cash to hold you over in tough times can be very valuable for your mental and physical health. The two most common questions I get is how much do I save, and secondly how do I start?
First step is to create a budget, which can really show what income is coming in, and more importantly, what is going out! Looking at ones spending habits is a great way to see what spending can be adjusted or eliminated in order to be able to save some money every month. Good question to ask yourself is if items are WANTS vs NEEDS. Spoil yourself every once in a while, but if you never make a sacrifice in the short-term, you will have a hard time reaching your savings goal.
Second step, once you created a budget, is to determine how much to save. General rule of thumb is you should save 3-6 months of living expenses. If there is one income earner in a household, then 6 months is usually recommended. If there are two income earners in a household, then 3 months of living expenses is usually used. The savings should be in an interest bearing “cash” account, such as a savings account or money market fund that can be readily accessible. The other benefit of having the cash available to bridge yourself in hard times is if you have other investments out there growing for other goals, you won’t have to sell these investments in possible “bear markets” when their prices are depressed. Allowing you to ride out that tough stretch for your investments will allow you to get the needed future returns to keep growing those investments.