Emergency savings allow you to pay for something you need when you don’t have the money to pay for it. Think of it like a fire suit
Imagine you are going to be a fire fighter. And before you start fighting fires you are given a fire suit. That suit needs to be sufficient, always ready, and occasionally upgraded. Hopefully, you will rarely need your suit and most of the time you’ll just be working out and pulling cats out of trees. But when you do need the suit, you won’t want to be without it. The suit will protect you from getting seriously injured, it will give you a sense of security. And it will allow you to take smart risks that you would be too dangerous otherwise.
Emergency savings are like that. They needs to be sufficient, always ready, and occasionally upgraded, like when you get married or have kids. Hopefully you will rarely need your emergency savings, but when you do—and everybody does sometime—you will be so glad you have it.
Your job right now is to start saving for your fire suit, so when it’s time to fight fires you’ll be ready. You don’t want to be trying to get a suit when you’re already on the job.
Save 12 months worth of expenses: $32,151. That’s the yearly living wage for a single working adult in Tucson, Arizona, but could easily be more depending on your expenses.
12-months of expenses is the best “fire suit”. Although you will learn to save for other things (cars, trips, engagement ring), *emergency* savings beyond 12-months of expesnses is unnecessary.
<aside> 💰 This plan is laser-focused on building that savings fund as fast as you can. This may feel frustrating at times because you’ll feel like you have money that you can’t spend on what you want. But remember, this is essential and once you get it done, you’re done. Also, after you save your first $5,000, you can reward your self with some small luxuries and slow down your building speed to 70% of income and save for a full six months. After savings six months worth of expenses, you are allowed to reduce your building speed again until you hit your final target. But by this point you may have learned the discipline of saving and still have few needs that you may choose to maintain or even increase you savings speed.
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Credit: Things I learned from Matt Miner and Ramit Sethi helped produce this plan.