Life happens. It’s as simple as that. No matter how much you plan, it is always a good idea to have some money saved away for when life throws you a curve ball. The term “emergency fund” gets tossed around very often, but the average person in their twenties remains unconvinced of it’s usefulness.
After the jump, I’ll talk about why having an emergency fund is not only a good idea, but how it forms the foundation of your financial security. I’ll also explain how to start building your own emergency fund and when to use it.
Even though we’re already over a month into 2015, I thought that a brand new blog should come along with it a list of resolutions for the new(ish) year. Throughout 2014 I made a bunch of great financial decisions: I finally finished building my emergency fund of about 4-6 month’s worth of expenses, I opened my own Roth IRA in addition to the Traditional 401k offered by my employer, I opened my own investment account through Vanguard, and I continued to maximize my employer’s 401k contribution match.
But there’s always room for improvement, so what am I doing this year in 2015 to improve my financial outlook? Hit the link to find out!
I recently reassessed my budget and it had me thinking back to the first time I really started to use Microsoft Excel for finance. After I received my first job offer coming out of college, my father had me meet with his financial advisor. I had a good track record managing my part-time income and never carrying a balance on my credit card, but a full-time engineer’s salary was a whole different ball game. From my salary, the advisor gave me a cash flow forecast to work with in Excel. I had never created a budget before so this was completely new to me. I realized how important it was to allocate my income so I could see how exactly where it was going and how it all balanced. I still have no idea how some people can live without a budget.
Altogether, it was actually pretty simple. My budget was divided into annual and monthly columns. I had my gross salary minus any pretax investments and benefit costs to produce my taxable income. From there, I subtracted my current tax rates to get my after-tax income. I then took out any post-tax investments. This is where my cash flow differed from many people I talked with. I always made sure to put money into my pre-tax and post-tax investments/savings before I factored in my living expenses. This ensured I always took care of myself first and meant I had to make the rest of my expenses work to stay within my income.