Tuesday, June 2, 2015

Basics of Financial Independence: Emergency Fund

1. Set aside 6-12 months of expenses in a savings account as a rainy day fund.
  • The very first thing one should do on the road to financial independence is set aside an emergency fund. And the first step in this process is finding out your average monthly expenses. This can be accomplished the easy way by using an expense tracker such as Personal Capital or by manually adding them (housing, utilities, food, etc) up using pencil and paper. Either way, this step shouldn't prove that difficult.
  • The next step would be to find a savings account that offers you some return on your money since the best case scenario is that this money will never be used. Deposit Accounts is a useful website that can assist you in finding a high interest bearing personal savings account that suits your needs. Personally, I am biased towards credit unions such as Alliant Credit Union but you are free to find one that best suits your individual needs.
  • So is it 6 or 12 months of expenses? Personally, I recommend having 12 months of expenses set aside just because of the peace of mind it buys. For example, with only 6 months of expenses saved the average person will start panicking after 4 months of being unemployed. This can lead to rash decisions being made. One way to have the best of both worlds is to first set aside 6 months of expenses, complete the remaining 4 steps towards financial freedom, then circle back and increase the emergency fund to 12 months of expenses.

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