A blog about spending wisely in your twenties, with advice on everything from cooking to saving money on gas; how to teach yourself to save money instead of spending it, traveling without breaking the bank, and much more.

Monday, April 14, 2008

What If Rent Was Already in the Bank?

Pretty much every financial book ever starts off with "Why You Need an Emergency Fund", generally about three month's salary or six-plus months of living expenses all stashed in a fairly liquid, but high interest account. Most of them also say that you should build this fund at all costs; take on a second job, sell something, whatever. I think an emergency fund is an entirely different beast if you're younger than 27. It's still a necessity, but our emergency funds can be a lot lower than 3 months salary. I'm not saying you should scrap the goal of ever having 3 month's salary stashed away, but if you start building a smaller emergency fund at a younger age, you don't need to flip out trying to put away $9000 or more when you're 30+.

First of all, we need a more concrete emergency to save for, an exact number. Busting your ass to save X thousand dollars doesn't feel like a goal, it feels like a chore- especially when you're used to living paycheck-to-paycheck. Anyone just beginning to become financially stable is likely to feel overwhelmed by the sheer amount to be saved if they go the three-months-salary route. I suggest that instead of randomly saving to reach an unspecified quadruple digit goal, begin with saving a backup of your most consistent, necessary expenses.

The obvious starting place for an emergency fund is rent. Just your rent, that check you start freaking out over on the 28th. If you can manage to have one month's rent stashed away, think about all the peace of mind you've got. Sick and can't work for a day or two? You're covered! Finals coming up? Take a day or two off to study. Most of us could have a month's worth of rent saved up after 3 months or so if we cut out some of our more frivolous purchases.

After rent, a month's worth of bills is the next obvious step. Sit down and calculate exactly how much you spend on bills every month. Spend a month or two focusing on adding that amount plus a little cushion to your fund.

Once you've got a month's worth of rent & bills stashed away, the next obvious necessity (for me, at least) is food. Figure out the minimum you need to eat decently for a month, double that- and work toward adding it to your fund.

My next step would be gasoline, but yours might be different. Instead of slaving away at a second job trying to save thousands, why not pick a series of smaller, more concrete goals and reach them by keeping your money instead of desperately trying to earn or find more when bills come due? Once you've saved up a month's worth of rent, bills, food, & gasoline...why not tack on another month's rent? After a while you'll have a few thousand dollars stashed away, earning interest, and you'll never have to panic about getting your rent in on time when you've lost income.

For some great tips on how to find money to put in your fledgling emergency fund, check out 50 Tips to Help Establish Your Emergency Fund at Consumerism Commentary.


Momma said...

You make some pretty darned good points. It IS easier to save for small goals and build on them than to look at that daunting number the "experts" say you need to have.

I look forward to reading more of your articles. I found you via the Carnival of Personal Finance hosted at The Happy Rock.

Anonymous said...

Great ideas! I know that just having a small cushion to start makes me feel much better than having no cushion at all!