Now that we have a basic understanding of what the “wallet hacking” equation looks like and have started to look into what our life costs us right now, we can dive a little deeper into the short term savings component. How much do you need to be saving on a monthly basis FIRST so that you’re prepared for anything that comes up in the next year?

It seems like we all have certain months that are just “really expensive”.  For instance, in September, my car registration was due, I paid for my ski pass, and I also had just moved into my apartment and had to put down the deposit and pay for moving.  All of those “unplanned” expenses resulted in quite the month. BUT, could I see those expenses coming? YES.

So, there are a few different elements that need to go into your short term savings bucket to make your life 100x easier and less stressful.

But before I even begin with this breakdown, where should you be holding your short term savings?

If you don’t have an online savings account, you need to get one.

At the brick and mortar banks (ie Wells Fargo, US Bank, Chase, 1stBank, etc.), you’re probably getting somewhere around a whopping 0.01% interest rate. To benchmark this, inflation has historically averaged approximately 3% per year, with the last few years averaging closer to 1%. In other words, the cost of goods and services has been increasing 1-3% annually, while your savings are increasing about 0.01% annually. The interest rate on your savings account needs to be at least pacing inflation, otherwise you are effectively losing money.

Online savings accounts are great! Right now Synchrony, Ally, and Barclay’s are offering the best interest rates (~1%), but they change frequently. The best approach is to simply Google “best online savings account” and look for the one with the best interest rate.  You just need to make sure that it is FDIC insured, free (no annual/monthly fees, no minimums, or /transfer fees), easy to access, and at least keeping up with inflation.

I know it sucks to have another account, but it’s worth it.

Keep a slush fund (about one month of fixed expenses) in your normal savings so you don’t over draft, but then move the rest to the online savings account.

An added benefit of opening an online savings account is that you will begin to separate your money from your mind. You’ll know you can always access this money if you need it, but it won’t be right there every time you log into your regular bank account!  Again, the more money we see, the more money we spend. It’s just human nature.

Now that we have addressed where to hold your short-term savings, let’s get back to what needs to be factored into your short term those savings:

  1. Basic emergency reserve of 3-12 months of your FIXED expenses to cover for unforeseen expenses.

  2. Any KNOWN expenses coming up in the next year or two.

I get a lot of questions about wanting to start investing, which is GREAT. I love that people are interested in getting their money invested. Yet, if you don’t have your basic emergency reserve established and your other foreseen expenses accounted for, investing further shouldn’t be in the conversation yet.

We have to walk before we can run.

What if you lost your job for some reason? Or your car breaks down and you need a new transmission? Or you have a big medical expense?

We have to hope for the best, but prepare for the worst. And if something like this were to happen, you don’t want to have to fall back on credit cards!  These are small risks that we can insure ourselves, it just takes a minute to get this set up.

Calculating your emergency reserve

What is the bare minimum that it would cost you to get by on a monthly basis? Rent/mortgage, car payments, groceries/food, utilities, etc.  Cut out all the fluff that you don’t NEED, and find that number.
Multiply it by 3. That’s the BARE minimum your emergency reserve should ever be.

In general, this number will fall around the 3-12 months of fixed expenses range, but is a bit of a personal/emotional choice as well.

If you work in a steady, W-2 type of job and you’re very employable, 3-6 months is pretty safe.

On the other hand, if you’re self-employed, a contractor, or you are in sales without a livable base salary, 6 months would be a minimum that I would suggest.  Even up to 12 months can provide some serious peace of mind!  I’ve been a 1099 contractor or self-employed for as long as I’ve been working, and I just know I’m much happier when I have closer to a year of expenses saved.

As with most things related to money, the “right” answer here will depend on everyone’s unique situation. Just make sure to align your emergency reserve with your own risk tolerance, and then move forward with the knowledge that you have established a solid “personal insurance policy”.

Calculating your Short Term Savings Rate

After you have taken care of the monthly bare essentials, it’s time to tackle your more infrequent, yet substantial, expenses such as car registrations, insurance renewals, or annual subscriptions.

Let’s say you added up all of your annual/semi-annual/expected expenses and they total to $6,000 each year.

Take that number and divide it by 12 = $500/mo.

Set up an automatic transfer from your checking account right after you get paid for $500 to go right to your online savings account. In your online savings, you can actually break the account down into different sub accounts to give yourself even more transparency!

By doing this, when you have to pay for your license plates, your ski pass, etc. you’ll have a little side fund set up to pay for just those things making those “expensive months” feel a little more normal, or at least anticipated.

It WILL take some time for this to feel natural, but once you get in the habit, you’ll thank yourself.

So, in conclusion…

  1. Set up an online savings account so that you’re at least making SOMETHING in the way of interest on your cash accounts.

  2. Calculate your desired emergency reserve and make a goal to get that amount built up ASAP!

  3. Add up your sporadic/non-monthly expenses and divide by 12. Make it a “budgeted” item to be paid out first, so that you can take care of your mental sanity and ultimately eliminate those “expensive months” all together! This is the first step in PAYING YOURSELF FIRST and a great habit to form as soon as you can.

Liked this blog? It was written by WalletGyde’s new financial mindset coach, Jordan Youngblade! Her philosophy is it’s not always about having MORE money – it’s about how you view and use your money. She will completely transform your money and LIFE through her process! Stay tuned, she will be sharing her expertise all month!

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