Savings
So far, we've covered income, expenses, and budgeting. These are all important parts of your personal finance foundation. But now we need to talk about what to do with the money that's left over each month.
The Emergency Fund
Before you do anything else—before paying extra on debt, before investing—you need an emergency fund.
An emergency fund is usually stored in a separate account from the one that your paychecks get deposited into, for two reasons:
- It keeps this money "out of sight, out of mind" so you're not tempted to spend it
- High-yield savings accounts earn more interest than regular checking accounts
Adjust your monthly expenses to see how much you should save.
How Much Should You Save?
Typically, it's best to have 3-6 months of expenses saved up in your emergency fund. Since you've already calculated your monthly expenses in the budgeting section, you know exactly what this number should be.
| Monthly Expenses | 3-Month Fund | 6-Month Fund |
|---|---|---|
| $2,000 | $6,000 | $12,000 |
| $3,000 | $9,000 | $18,000 |
| $4,000 | $12,000 | $24,000 |
What's It For?
This account will help you when:
- Your car needs a major repair
- You get laid off from your job and need time to find a new one
- An unexpected medical expense comes up
- Any other financial emergency that would otherwise derail your finances
Important: Your emergency fund is not for vacations, new phones, or "I really want it" purchases. It's insurance against life's surprises. Treat it as untouchable except for true emergencies.
Additional Savings Goals
Sometimes people find additional savings accounts helpful for saving toward future large purchases:
- A down payment on a house
- A new car (to avoid a loan)
- A wedding
- A vacation
These are separate from your emergency fund. Keep your emergency fund sacred and fully funded before starting to save for other goals.