4. Save 3 - 6 months of expenses in a savings account.

You need to have a robust savings account to protect against something bad happening.

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Reasons

Primary Reason -> you won't have to worry about falling back into debt if something financially catastrophic happens.

 

What if you lose your job?

• The rule of thumb is to have 3 - 6 months of expenses saved in case you lose your job. This way, you don't have to worry about paying your bills when you don't have income coming in.

• Why 3 - 6 months? That is typically the amount of time it takes to find a new job.

• There is no direct science here so there is a bit of flexibility in the amount you can save. You can also feel free to save more than 6 months if that is what makes you comfortable.

 

Big Purchases

• I keep roughly 6 months of expenses in savings. Reason being, I also lump in major purchases.

• Major Purchases includes: buying a car, house renovations, the need for new appliances, family vacations, celebration expenses, or paying a contractor in case something breaks.

• Including 6 months of expenses allows me to prepare for the worst (losing my job, the roof leaking etc.).

• It also serves as a great starting point in case my wife and I decide buy a bigger house. Having this much in liquid savings gives us the flexibility to make decisions about our future more easily.

• There are plenty of other topics we could discuss around major purchases, but each person's financial goals are different. Please reach out if you are looking for a more nuanced approach.

 

Tips      

 

Put this money in a High-Yield Savings account

• 3 - 6 months of expenses can be a lot of money - don't let it sit in a traditional savings account. Reap the rewards of a higher interest rate in a high-yield savings.

 

Create a budget

• Yes, this is a recurring theme here. But how else are you going to know what 3 - 6 months of expenses look like if it's not written down

 

This money should be "liquid" and non-taxable

• This money should be in an account that you can access immediately (i.e., not in a CD or T-Bills).

• It should also be separate from any money you have in stocks (individual names, index funds, IRA, etc.). It's not always fun to have to sell stocks for a major purchase and pay taxes on any capital gains you might have.

• In layman's terms, keep this money in a checking, savings, or high-yield savings account.

 

Types of Accounts

• Checking Account -> This is your typical bank account where your everyday spending money should be. 

• Savings Account -> This account should be used to "save" your money, meaning you don't use these funds unless absolutely necessary.

• High-Yield Savings -> This is a type of savings account that earns you more interest on your money. It will allow your money to grow faster than a traditional Savings Account would.

• Money Market Accounts -> These accounts are a cross between checking and savings accounts, and typically offer higher interest rates than savings accounts. These are typically offered through an investment account.

• Certificates of Deposit -> These accounts are a type of savings account with a fixed interest rate and term, and usually have higher interest rates than regular savings accounts. Withdrawing money early may result in an interest penalty.

• Treasury Bills -> Also known as T-Bills, is a short-term debt obligation backed by the U.S. Department of the Treasury with a one-year maturity or less. This is not a traditional account and is not for the average person.