In the last article in this series, we’ve talked about how to save money from your monthly revenue, so in this article, we’ll continue with the first thing to save money for.
When considering savings, we generally consider investing in stocks, bonds, real estate, or other long-term options.
However, the first step in savings should be for the short term. The long-term options are generally illiquid; if something happens and you need money immediately, it might be the wrong time to sell stocks, while for real estate, it would take a long time to sell.
The first thing you should save is the equivalent of 1-2 months of salary. You can tap into this emergency fund if your boiler breaks or anything unexpected happens. This fund should be kept in your current account and accessible without financial penalty. If your monthly revenue is considerable, you can round down towards the minimum of 1 month, but make sure you have enough to cover the emergencies.
The second thing you should save is the equivalent of 4-6 months of salary. This is the fund you would tap into should you lose your primary income and need a period to transition into a new job. These 4-6 months can stretch to a more extended period if you cut down on discretionary spending while looking for a new job.
The biggest mistake you can make is to think of your job as completely safe or to think that should you lose your job, you could find an equally good one in less than one month. The problem with this logic is that, most often, the timing of losing your job coincides with an economic slowdown.
Unlike the 1-2 months fund, the 4-6 months fund doesn’t need to be immediately accessible; it can be made in 1-year deposits that mature every other month.
This way, if you lose your primary income, you can start liquidating the 6 deposits every other month, and with the 1-2 months fund, it can cover you until you find a new job. You can rebuild the short-term funds as soon as you get back your primary income. Should nothing go wrong, the deposits still earn a minor but guaranteed yield.
With this strategy, you don’t have to touch the long-term savings and potentially take a penalty on their liquidation.
Also, the stress of an unexpected expense or losing your job is more bearable when you don’t have to worry about your family’s financial security. This also allows you to make better decisions when looking for a job if you’re not forced to take the first deal offered and can wait for the best opportunity.
In conclusion, before your long-term, high-yield investments, take care of the short-term funds you can structure as described in this article and size to your particular needs.