Your 2012 SUV model is cruising to work early one morning ahead of any sign of traffic when all of sudden you hear knocking in the engine. The automobile is moving slower than it was ten seconds ago; yet, your foot is pressing harder on the accelerator trying to move faster in hopes of getting to work on time. After a trip to the mechanic, you find out that a piston blew and the mechanic needs to replace this $2,200 hefty bill.
According to a recent report from CareerBuilder, "seventy-eight percent of full-time workers said they live paycheck to paycheck" in 2017 which is a three-point bump from the prior year.1
With more families living to make ends meet, "Only 39% of Americans have enough savings to cover a $1,000 emergency."2 With such dynamics and unexpected expenses, it only highlights the importance of stashing away money for a rainy day. People do not typically plan to fail, but rather fail to plan. When saving towards an emergency fund, it is usually recommended to save between three to six months worth of monthly income to avoid such situations. This can be a daunting task when one hasn't properly planned. To begin, one needs to set up a budget and highlight areas to cut or reduce expenses--starting small and taking little steps will allow one to condition him or herself to live within one's means.
By reducing expenses, find a way to stash away $20-$40 per week. If consistent, this small sum will amount from $480 to $960 within a six-month period. By conditioning your mindset and money habits, you will be amazed at how one month you can accumulate an extra $20-$30 to put away. This $960 will grow faster because you have conditioned yourself but most importantly, your mindset--it's psychological and mathematical.
But why sock away money? When families go on vacations or looking to make purchases, they are likely to use their credit card. Credit cards accumulate interest meaning a family moves backwards in the financial grand scheme of things; not financially forward in the sense of savings. One must avoid such temptation. Also, when mechanical problems exist as such as the introductory story, one will have this amount to assist in the payment therefore alleviating the financial stress.
In conclusion, three or six months of savings is a debatable topic because it really depends on the difficulty to reach such a milestone. I highly encourage one to aim for three months as the first milestone and once that has been reached, then proceed to continue to save until one reaches six months. By properly planning, one can decrease his or her chance from financial failure.
1. CNBC https://www.cnbc.com/2017/08/24/most-americans-live-paycheck-to-paycheck.html
2 Bankrate https://www.bankrate.com/banking/savings/financial-security-0118/