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Financial Literacy
Course: Financial Literacy > Unit 2
Lesson 3: Saving money- Why and how to save
- Why and how should I save money?
- Planned and unplanned expenses
- I am ready to save. What is the next step?
- Saving wisely: emergency fund
- Emergency fund
- Saving wisely
- Saving wisely: planned expenses
- Paying yourself first
- Pay yourself first
- Paying yourself first
- What are different types of savings accounts?
- What is interest and how does it work?
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I am ready to save. What is the next step?
Learn about different strategies for saving.
Savings are like a guardrail for your financial plans - they ensure that even if something unexpected happens, your plan remains in place and you are still building a better financial future.
Emergency fund
If you are following the 50/30/20 rule for budgeting, you are already setting aside 20, percent of your income for savings. Now, let's break that down even further. We already know that having an emergency fund is essential to protecting all aspects of our budget. An emergency fund is where most, if not all your savings should go until that fund reaches its intended amount.
The recommendation is that your emergency fund has three to six months' worth of living expenses/needs in it. Expenses like dining out and entertainment should not be included in this calculation, as they can easily be eliminated in case of an emergency. So, what does that look like in real life example?
Example
Ella, who works as a store manager, has a monthly salary of dollar sign, 5, comma, 200. Ella has decided to start building an emergency fund and knows that she should have three to six months' worth of expenses in that fund. Looking at her monthly budget, Ella identified the following as her essential living expenses:
| Expense | Amount |
|---|---|
| Rent | dollar sign, 1, comma, 100 |
| Utilities | dollar sign, 220 |
| Car payment | dollar sign, 460 |
| Insurance | dollar sign, 85 |
| Groceries | dollar sign, 600 |
| Phone & internet | dollar sign, 129 |
| TOTAL | dollar sign, 2, comma, 594 |
We can say that Ella has about dollar sign, 2, comma, 600 worth of living expenses per month. If her emergency fund is to have three months' worth of expenses, then her emergency fund should have dollar sign, 7, comma, 800 in it. But what if it's six months' worth of expenses? In that case, she should have dollar sign, 15, comma, 600 in emergency savings.
Ella has been following the 50/30/20 rule and is saving 20, percent of her income. If she is going to try and save three months' worth of expenses, it is going to take her about 8 months to do that.
Practice
If Ella' goal is having six month's worth of expenses in her emergency fund, how long will it take her to save the full amount?
(Remember, her goal is dollar sign, 15, comma, 600 and she saves dollar sign, 1, comma, 040 each month).
divided by = start text, m, o, n, t, h, s, end text.
Want to join the conversation?
Hey, David Alexander, do you work here(5 votes)
No. I don't work here. I merely have too much time on my hands, and like to imagine that I'm helpful.(7 votes)
1040/15600= 15 months or if you want to break it down further. One year and 3 months to be exact.(5 votes)
1040/15600 ≈ 0.066
15600/1040 = 15
Almost there.(5 votes)
What are things you should do if you are unable to build a emergency fund due to high living expenses, such as if you live in an area where you're not able to meet minimum housing?(5 votes)
Especially with the high living expenses of today, it can be hard to meet your needs.
1. I think it is better to start small and save up all the spare change you can until it gets to be enough where you can deposit it into an account in a bank.
2. Another thing you can try and do is reason with your boss or manager as to why you need or would benefit from a raise. Most bosses will reason with you and you can try to make a compromise.
3. You can also try and negotiate your bills,e.g.:
your electric bill
house payment
car payment
etc.
by talking to the moderator of your bills inside of the company to which you pay.
Any more questions, just comment on mine!
I hope this helps!
- Izzy(3 votes)
I don't have any questions(6 votes)
This is something that is good to have at the back of your head when your looking for a job.(5 votes)- awesome, I am happy I have found out this at my 26(5 votes)
- How would you know how much money your spending a month and what its being spent on?(3 votes)
- You either get an app for your phone, and enter every act of spending into it for a few months, or you carry a notebook and pen, and write everything down. In this way, you create a data base for use in future planning.(4 votes)
- Is this implying that all of your initial savings should go into the emergency fund until the goal amount is reached? And only then use the savings for investing and other purposes in the following months?
And, once you have reached your goal (typically 6–8 months of living expenses), should you continue to add to this emergency fund?(2 votes)- Once you have designed a budget for yourself, your plan should include creating a fund for emergencies. That fund has a target amount, which is recommended to be 6 to 8 months of living expenses. Once that account is fully funded, you will have a surplus in your regular income, which won't be devoted to filling your emergency fund. At that time you may choose to work on another goal, such as purchasing a vehicle, home, farm, factory or executive aircraft. If you have no "purchase" goal for that excess income, you might choose to engage in some risky but potentially profitable investment arrangement. Revisit the emergency fund every year or so, especially if your income grows. what was 6 to 8 months of income only a few years ago may be only 4 to 6 months now, so you may have to add more to it.(5 votes)
Why would her emergency fund have the money that she needed to pay for her living expenses? How would she save the amount of money that she spends?(2 votes)- First you compute, based on experience and good record keeping, the amount you need for regular living.
Then, you multiply that by the number of months that you might go without any income.
Then, you begin to save an emergency frund that will be for use ONLY in months when you don't have any income.
You save money for this emergency fund, until it is full.
After your emergency fund is full, you have available to you the amount that you've been putting into it to do fun and creative things.(4 votes)