What Are Essentials for 3–6 Months of Expenses?
Brian has $14,000 in savings. What are essentials for the 3–6 months of expenses?
QUESTION: Brian in Indiana has $14,000 in savings. What are essentials for the 3–6 months of expenses?
ANSWER: What would it take you to operate your household per month? There are all kinds of things you can put under essentials. What does it take to operate your household reasonably for a month? Then multiply that by three or six and you’ll have the right amount of money that you need set aside to be in good shape.
Everybody gets real technical about, “Do I need three? Do I need six?” And you can get technical for a while because you want to start Baby Step 4—investing in retirement—and move on to Baby Step 5 and start saving for kids’ college and that kind of stuff, but you’re going to reach a point in your wealth building that you’re going to enjoy having a good-sized emergency fund. There is a peace that goes with having no debt and a good-sized emergency fund. You reach a point that you’re not concerned about it being too big. You don’t want to be crazy about it being too big, but I’m not concerned if I have six months instead of three months. I’m not concerned if I figured out that essentials or expenses were a bigger number, thereby use a bigger multiple thereby I ended up with more in my emergency fund.
An emergency fund and having no debt just creates a ton of financial peace—two words that don’t go together, kinda like airline service.