Six Months Savings Reserve
Because flat tires happen to everyone
We have all experienced the dilemma: a flat tire, a trip to the emergency room, urgent travel for family emergencies, you shatter your cell phone on the kitchen floor, or you may even lose your job… situations that are unexpected, yet they can happen to anyone at anytime. These are the types of things that can ruin any well-intentioned budget. But for those who prepare, these scenarios do not put a glitch in their financial plans and long-term goals. The key to weathering these budgeting storms is to build a liquid savings reserve. Not just any savings reserve, but a well-planned, large pool of savings that will get you through just about any unexpected glitch in your life.
The solution is to take your Two Months Savings Reserve from Level One… and turn it into Six Months Savings Reserve (minimum). So, if you make $60,000 gross annual income, you would build $30,000 in your reserve. If you make $200,000, you would build $100,000 in your reserve. The key here is to plan for what you truly want, not for the bare minimum to get by. If you lose your job and are temporarily out of work for a few months, do you want to be forced to sell your belongings just to pay your mortgage and bills? Or do you want to have a nice cushion to bridge the gap between jobs? We like the latter scenario because, during a crisis, the last thing you want to worry about is money and how you are going to pay the bills and put food on the table.
Some other factors to consider in determining the amount of your savings reserve include your job security, the condition of your real estate, and the health of you and your dependents. You also may want to consider the amount of deductible on your auto, homeowners, and health insurances. In other words, what if you had a car accident, a house fire, and a hospital stay all the same year? It unlikely, but you don’t want to be forced to liquidate your 401(k) with penalties if you can avoid it. Naturally, such factors change with time, so it is important to review your savings reserve on a regular basis. But the bottom line is to always keep a minimum of SIX MONTHS of your annual gross income in liquid savings… and more if you have additional risk factors.
How Much Should I Save Each Month?: Click here to read about why we save 15% of our gross income each month.
When to Use the Savings Reserve
The savings reserve is a pool of funds that you hold in a readily available form to meet unexpected needs. For example, what if you had a sudden loss of income? Or what if you had an accident and needed funds to get your automobile repaired so that you could continue to get to work? I would consider these emergencies that would be eligible to use savings. On the other hand, purchasing an expensive item that suddenly goes on sale or buying stock when its price suddenly drops is not a good use of savings dollars. It’s vital to understand the difference between “need” and “want” when developing your concept of how these funds are used.
Emergency funds are not to be used for meeting anticipated expenses like paying your real estate taxes, your gas and electric bill or a student loan or tuition, or even taking a vacation. Instead, an emergency fund should be viewed as a fund that will protect you, your family, and your loved ones against unexpected financial crises.
Don’t Put the Cart Before the Horse
Many of our readers tell us that this six months liquid pool of savings in Level Three is more difficult to build because it is tempting to want to begin investing and taking risks. But as we always says, “Don’t put the cart before the horse.” Savings first, then investing.
There is plenty of science behind this concept of prioritizing savings in your financial game plan. Dedicated savers are better prepared in times of economic crisis because they have quick access to liquid capital to seize on opportunities. Also, good savers make better investors because their access to liquid capital lowers their desire to take on too much risk.
Building your six months savings is one of the most important steps in our entire program.
This savings provides you with a safety net for the unforeseen events that can happen to anyone.
It also allows you to go back and rearrange your Level Two protection in a more favorable way (if you have a sizable pool of liquid savings, you can afford larger deductibles and obtain lower monthly insurance premiums).
And a third advantage of having your savings is that, as you move into Level Four, you will not feel the need to take on excessive risk with your investments. You will also not need to liquidate your investments as quickly if, for example, an emergency arises, because you have liquid savings on which you can rely on.
In order to build your six months of savings, we recommend saving at least 15 percent of your income every month. For example, if you earn $5,000 in gross monthly income, we suggest saving a minimum of $750 to go toward your liquid savings pool. For some of you, this is no problem. You can easily save 15 percent and may have already been saving this much or more, especially if you are progressing IN ORDER within our Five Levels of Financial Freedom program.
More Resources from FTMDaily:
- Three Unique Ideas To Increase Your Savings Now
- 8 Ways to Save Money Fast
- Stop Wasting Money: Seven Ways to Cut the Fat from Your Budget
- 3 Steps to Cutting Expenses
- 10 Ways to Avoid Shopping Traps and Spend Less Money
Before proceeding to the next step, be sure that you:
|– Continue systematically saving 15% of your gross income each month.||– Build savings reserve to a total of six months gross income.||– Don’t be tempted to begin investing until you have your savings complete.|
When you completed this step, you are now ready to advance to the next step of Level Three which is to Diversify Your Savings.