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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% 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 $5,200. 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:
ExpenseAmount
Rent$1,100
Utilities$220
Car payment$460
Insurance$85
Groceries$600
Phone & internet$129
TOTAL$2,594
We can say that Ella has about $2,600 worth of living expenses per month. If her emergency fund is to have three months' worth of expenses, then her emergency fund should have $7,800 in it.
But what if it's six months' worth of expenses? In that case, she should have $15,600 in emergency savings.
Ella has been following the 50/30/20 rule and is saving 20% 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's 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 $15,600 and she saves $1,040 each month).
÷
=
  • Your answer should be
  • an integer, like 6
  • a simplified proper fraction, like 3/5
  • a simplified improper fraction, like 7/4
  • a mixed number, like 1 3/4
  • an exact decimal, like 0.75
  • a multiple of pi, like 12 pi or 2/3 pi
months.

Want to join the conversation?

  • duskpin seed style avatar for user Portia
    1040/15600= 15 months or if you want to break it down further. One year and 3 months to be exact.
    (12 votes)
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  • starky ultimate style avatar for user caleb
    15,600/1,040=15
    (18 votes)
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  • blobby green style avatar for user Gaurav
    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?
    (7 votes)
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    • aqualine tree style avatar for user David Alexander
      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.
      (12 votes)
  • boggle blue style avatar for user x.asper (bio)
    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?
    (7 votes)
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    • starky sapling style avatar for user Izzy
      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
      (7 votes)
  • marcimus purple style avatar for user ariyalsanders16
    This is something that is good to have at the back of your head when your looking for a job.
    (7 votes)
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  • blobby green style avatar for user sakibnazmus44
    awesome, I am happy I have found out this at my 26
    (7 votes)
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  • blobby green style avatar for user basto,gabriela
    How would you know how much money your spending a month and what its being spent on?
    (3 votes)
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  • blobby green style avatar for user ankitp544
    I find it hard to create my budget due to, too many liabilities, like my younger sibling's education, and my elder sister's marriage. How to manage your budget? if you have such heavy expenses. I can save only 10% at the most. Since I have so many loans to pay for.
    (3 votes)
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    • sneak peak yellow style avatar for user William Wang
      If you have many expenses, it will not be very easy to save — if you do, those amounts will likely be pretty minimal. Do what you can to pay for your loans and other expenses while saving a few dollars here and there, and your savings will add up over time.
      (4 votes)
  • blobby green style avatar for user 60462
    do i use a caculator
    (3 votes)
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  • duskpin sapling style avatar for user Meenu Sharma
    How can we reduce the time ( no of months) to save for rainy day faster?
    Are we not saving for retirement in these months or other projects?
    (1 vote)
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