Creating a Financial Reserve That Lasts 6 Months
With all the twists and turns in the economy today, a healthy financial reserve is not just good practice, but necessary. A six-month emergency fund can give you critical breathing room if you are ever faced with a job loss, a medical emergency or any unexpected life changes. Of course, it takes money and discipline to build that buffer. The following steps will help you build a financial reserve that can support you for six months.
1. Analyze Your Monthly Expenses
Before you begin to save money, it is important to know how much you need to have saved in the first place. Start with your minimum monthly expenses. You will need to include:
• Rent or mortgage
• Utilities
• Food
• Transportation
• Insurance (health, car, etc.)
• Loan payments
• Minimum debt repayments
After you come up with a total for your monthly essential expenses, multiply this number by 6. This will give you the amount you should work toward saving. For example, if your total expense is $2,500 per month, then your total savings to reach $15,000.
2. Open a Dedicated Savings Account
It's important to keep your emergency fund separate from your checking account or general savings account. This way, you won't find it tempting to take money out for non emergencies. Looking for a high-interest savings account or a money market account will help keep your money earning something. You also want to remove the temptation of having easy access to the cash that you will take out for non emergency expenses.
3. Have a Realistic Timeline
You are not going to be able to build a six month supply overnight. You need to come up with a realistic timeline based off of your income as well as your budget. For situation if you are able to save $500 a month, your $15,000 or six month reserve will take 30 months to build. You can easily adjust your timeline for raises, bonuses, or when you drop expenses.
4. Automate Your Savings
One of the best ways to fill your supply is to automate your savings. Set up a recurring monthly transfer to your emergency savings account just after you get your paycheck. You need to treat this just like rent or utilities and not touch the money unless it's an emergency.
5. Reduce Non-Essential Expenses
To help speed up the amount you save, find the areas you can reduce spending. Think about:
• Canceling your subscriptions you don't use
• Cooking at home and eating out less
• Cutting back on impulsive shopping
• Shopping with a list, grocery store flyers and a budget
The little things can all add up to some serious savings after time.
6. Increase Your Income
If cutting expenses doesn't seem to help, think of other ways to increase your income. Side jobs, freelancing or selling items you don't use will all help you reach your goal faster. Be sure to put any extra income, like tax refunds or bonuses, straight toward your emergency fund.
7. Check-in and Change
Check-in regularly and evaluate your expenses and progress in saving enough for your financial reserve. Life happens, and so too should your reserve. If your monthly expenses are now higher because you would rather not acknowledge the rise of inflation or your lifestyle has changed for whatever reason, you should now save more into your reserve.
8. When to Spend it
A financial reserve is only to be used in emergencies—job loss, medical issues, or house repairs that you cannot postpone indefinitely. You should NEVER use it for planned expenses (vacation, gifts) or items that you think you should be able to live without. If you use your reserve, you should focus on replenishing your reserve as quickly as possible.
Final Thoughts
The six month reserve is one of the best financial moves you can make. A financial reserve provides peace of mind, reduces stress, and provides you with options during uncertain times. By being disciplined and planning ahead, along with regularly and consistently contributing towards your reserve, you can build out a financial safety net for yourself personally and professionally.
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