Build Your Emergency Savings Reserve
And keep it liquid…
Now that you have determined your profit (savings) rate, its time to open a savings account and begin filling it up with cash. Your two immediate goals now are to:
1) Open a savings account
2) Accumulate 2 months of your gross income in savings.
Later, in Level Three, you will be increasing this savings amount from two months of gross income to six months. Additionally, in Level Three, you will be introduced to our savings diversification strategies that include precious metals and stable foreign currencies. For now, however, just focus on building two months your gross income in liquid savings.
Before we dive headlong into creating your two months worth of liquid savings, you should first understand its purpose.
It is an emergency reserve. First and foremost, the money that you will be saving will available to you in the event of an emergency. For this reason, it should be extremely accessible at all times.
It is a pool of opportunity capital. As you continue down the path towards financial freedom with our Five Levels, I am going to teach you how to spot opportunities. Those who have cash can take advantage of deals when they present themselves. Many Americans became millionaires during the Great Depression of the 1930’s. Those that did had two things in common: 1) They knew how to spot opportunities and 2) They had cash on hand, or had access to cash.
What do I mean by “liquid?” The term liquid, when applied to financial matters, simply means that the money is easily accessible. In other words, don’t put your two months worth of savings into your 401(k) or an IRA. That is not liquid because withdrawing funds from these types of accounts is not easy or cheap. I would also avoid a long-term Certificate of Deposit (CD). Instead, keep it simple and make sure the money can be accessed instantly if needed. The savings that you are creating needs to be available to you instantly in the event of an emergency or an opportunity.
If you already have two months of your gross income in the form of liquid savings, then you can proceed to the next Level.
Unfortunately, the mainstream financial media today has taught Americans a lot of bad financial habits. One of those bad habits is not knowing the difference between “saving” and “investing.” For this reason, millions of Americans have little in the way of liquid savings. They may have a house and a 401(k), but these are not liquid. So when a financial emergency arises, many Americans have to turn to Visa or Mastercard. But not you. You are going to understand the difference if you don’t already. Repeat after me: “Saving is not investing and investing is not saving.” So don’t try to invest your liquid savings. And don’t let anyone talk you into it either. This money is to remain liquid for as long as you are alive.
If you do not already have a savings account, it is time to open one. What kind of account should you open? It really does not matter at this point. It can be a traditional savings account, a money market account, or any other type of liquid account. If your bank, or the company that you work for, can set up automatic deposits into this savings account on a regular basis, I urge you to do it. While paying yourself first may sound easy, it is not. The corporate-financial-marketing matrix that we live in today is constantly trying to pick your pocket. Unless you have superhuman willpower, you will find it difficult to move money to your savings account once your paycheck lands in your checking account. So make it easier on yourself by opting for automatic deposits into your savings account, if possible.
Now that you have your savings account open, it is time to get busy saving money!
To determine how much money you will need to save for this step, simply multiply your current gross monthly income by two.
Example: If you earn $3,000 per month then your savings goal for this step is $6,000 ($3,000 x 2).
As mentioned, I am going to ask you to increase this amount to six months of your gross income once you reach Level Three. But for now, two months of liquid savings is all that you will need. Once you reach your goal of two months of liquid savings, it is time to move on to Level Two!
Before proceeding to Level Two, be sure that you:
|– Understand the difference between saving and investing.||– Open a savings account (or any other “liquid” account) and request automatic deposits from your workplace or from your checking account.||– Accumulate two months worth of your gross income in savings.|
When you completed this step, you are now ready to advance to Level Two! Congratulations!