Step One: Emergency Funds
After figuring out that we both wanted to increase our financial independence, we needed a game plan. Que obsessively Googling! First things first: we needed emergency funds.
An emergency fund is a prerequisite to the auto pilot method of savings described below, because if the unthinkable happens (car crash, medical emergency, family emergency, losing your income from your job, etc) and your money is all tied up in auto investments you will not have enough cash to ride out the storm.
The consensus seems to be that most people are comfortable with a 3-6 month safety net for their emergency fund, although this is entirely personal. This means that even if you don’t generate any income at all, you could cover your expenses for a predetermined period of time. You can determine how much you need by deciding how many months you wish to cover expenses for and then looking at your expense data per month and multiplying! Choose this number while considering what you would be comfortable with, and save it first before setting up any kind of investment plan.
Step Two: Choose a Method
Once establishing a dollar amount for our emergency funds, I researched savings methods. The two I like the most are termed “pay yourself first” and “cover expenses first”. The “pay yourself first” method entails determining a percentage of income or a set dollar amount and setting it aside before budgeting. The “cover expenses first” method entails covering all necessities first and then dividing the remainder of the money between savings and wants.
I settled on the “pay yourself first” method of saving. The name stems from the idea that by taking a portion of your paycheck out before even touching it, you are paying your future self a paycheck based on the return on investment that this money will (hopefully) generate. Most banks allow you to set auto transfers from checking to savings each month or each paycheck, and this seems like the easiest way to go about things. 401k contributions come out pre-tax, and then the rest of the “pay yourself first” money can go into an individual Roth account a few times a year.
Step Three: Put Your Money to Work
The next logical step is choosing how exactly to invest your savings, and this is where the process becomes much more personal. In the next financial post, I will discuss how one’s personality affects investment choices, and what I personally plan to do with my savings. Thanks for reading!
Special thanks to Matt for driving all the way from Seattle to Tri Cities to visit us over the weekend to hike and wine taste! I hope you had a blast!
I did have a blast. Thanks for having me
Come visit anytime!! Congratulations on the job 🙂