When it comes to personal finance, do you ever feel like you hear the word “saving” way too much? From those closest to you (such as your parents or grandparents) to the self-made billionaires that you see on TV, everyone talks about the importance of saving.
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All this talk about saving and I wonder, in the history of human beings, was there ever anyone who dared to question why saving is important? I don’t think so… We all know we need to save. The burning question is HOW MUCH and WHEN. If you are looking to see the magic numbers here, you can consider yourself tricked into clicking on this post. However, if you want to learn how to figure out the amount of money you need in your savings and when you should start saving, then do stick around.
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Before we get started. I am not Mr. I-stare-at-crazy-graphs-all-day, manage-millions-of-dollars, financial-guru. Now you are all thinking; “Why should we read what this guy has to say then?” Well…(drum roll please)
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I have a degree in finance from the most reputable, well recognized, and 100% free university called LIFE.
The first professional job I had was in 2012; right after graduating from college. I was just about to turn 22. Life had not been easy in the years prior, especially college. I worked 35 hours a week on average during the school year and 70 hours a week in the summer. As soon as I graduated from college and got a job, it was time to catch up on all things I missed out on while working night and day.
Suffice it to say, I blew my money. I made sure not to spend money I did not have. Nonetheless, anything left over after paying my bills was either spent on shopping, vacations or going out partying. I told myself “I am still young, so let me just have fun for a year or two and then I will start saving.” So long as I did not put myself in debt, spending what I made seemed like a well-justified action.
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Suddenly, 9 months into this job, right before I turned 23, I found out that the company I worked for was going to merge with another company, and that my department was to be eliminated. This came as a huge surprise to me because one of the things I took comfort in was the fact that the company I worked for was doing very well. Although the company offered a generous severance package (which by the way, is what you get paid when you get laid off), that amount was based on years of service. Having only worked there for 9 months, the amount I got paid was barely equivalent to one paycheck.
It was at this point that I learned my first lesson on finance.
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When should you start saving?
The answer is the very day you start making money; that is when you start saving.
I spent the next few days, after losing my job, in my apartment, thinking about what just happened to me. Being laid off is one of those things you hear people talking about, yet it would never cross your mind that it could happen to you. The following week, I patched up whatever was left of my broken ego and decided to look for a job. Days went by without hearing back from prospective employers. Days turned into weeks, still nothing. Shortly after, it was time to pay rent for my apartment. And I went:
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“…wait how much money do I have left? How long is it going to last me?”
This is lesson number two. Know your Fixed Expenses.
Up to this point in my life, I have never really added up all my bills. I knew that I made enough to cover them, but never once did I take the time to know exactly how much my basic expenses were. So, before you go ahead and figure out how much you really need to save, you must first know what your basic expenses are.
a.k.a. Fixed Expenses, are expenses you have no choice in but to pay. Bills such as rent, utilities, car insurance, car payment, food/groceries, student loans, phone bill, and any other bills you have that you constantly pay every month. Think of fixed expense as money spent on your basic needs.
At the time, in order to figure out how long the money I had left in my account was going to last me, I had to actually sit down and add up my monthly fixed expenses. Once you do that, you should ask yourself one of the most important questions you will ever ask yourself.
How many months of fixed expense should I save?
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The answer to this question depends on your comfort level. It is recommended that you save for no less than three months of expenses. Some like to have enough money to cover for 6 months or more. This all depends on your comfort level. The main thing here is that you are saving for a rainy day. Although my rainy day was in the form of unemployment, anything could have happened. Should you lose your job or your car breaks down or you get hit with a sudden medical bill, you need to be financially fit enough to get through these rough patches. This is your emergency fund.
Once you figure out how many months of fixed expense you want to save for, multiply that number by your fixed expense and…
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Voilà!!! You have your emergency fund a.k.a. the magic number.
As for my story, it took me over two months to get a job. Since then, I have learned from my mistakes. Currently, having enough savings to last me for 4 months is where my comfort level is.
To wrap this up:
When Should You Start Saving?
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The moment you have money in your bank account. The reason is that you just never know when life will go sideways. Learn from my mistake and never gamble with your future.
How Much Should You Really Save?
Emergency Fund = Monthly Fixed Expense X number of months you are comfortable with
Stay tuned for part 2. I will share some of the strategies I used to change my spending habits and save for my emergency fund.
Also, check out the WalletGyde blog for more posts on finance, and unique approaches to saving money.
If you found this post helpful or you have had a similar experience, please comment below!
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