Financial gurus like Dave Ramsey, Suze Orman and Sakina Spruell teach key finance knowledge. They’ve been known to recommend 6 months of savings before beginning to invest so you can become a financial success.
Their reasoning is that if you have an emergency or unexpected event, you should be able to live off of your emergency fund for 6 months without touching your investments.
When you invest, you should be using money that you don’t expect to need in the next few years.
Investing for short term gains typically ends badly with an empty account and an upset account holder.
Trust me on this one.
But everyone is different. The best aspect of personal finance is its personal nature. Your situation is different than your neighbor, your sister, and definitely that kid from third grade who never listened in math class.
So how do you know how much of an emergency fund you should have?
You should think of your personal situation.
I agree with the personal finance experts. At least, to an extent.
You should have a rainy day fund and save for those unexpected emergencies, but I believe that time is your most valuable asset.
Especially since you are young and have the time to invest; you shouldn’t waste this time.
While you are young, you likely have a support group to help you out in case of an emergency. Your parents for example, or grandparents.
You won’t seem very independent, but you can use this time while you are dependent to learn how to invest properly. That way, when it is time to take care of your parents, you have the money to do so.
If you still want to build your rainy day fund and your investments at the same time, you could split your savings in half.
One half in a cash savings account and the other half in your investments.
If you had a true emergency and you decided to buy stocks, you can sell your stock and take a withdrawal. Typically, the funds would be available within 3 days.
If you are saving with a certificate of deposit (CD) then you may face a penalty if you withdraw too soon.
The idea is that you can still withdraw your money from an investment account even though it may cost you in terms of fees or lost gains.
And in the meantime, as long as you stay emergency free, you can earn interest and learn valuable investing skills.
If you see yourself as less of a risk taker and you absolutely demand to have an emergency fund, here is a simple way to calculate the appropriate size.
Pull together all of your expenses and eliminate any that are unnecessary. In general a phone, a method of transportation, food, and housing should be on the list of necessary expenses.
Then multiply that by 6. Based on the quantity of unnecessary expenses that you have, you might even find ways to trim your current budget!
Do you have 6 months of savings? Are you determined to worry about it when it happens?