Step #4: Create a Strategy for Short-Term Savings
Imagine if you had to pull money out of your 401(k) when your home’s A/C unit needed to be replaced. What if you had to open a credit card to pay for groceries after losing your job? How would you ever get ahead if you kept borrowing money from your future? You wouldn’t.
If your goal is financial freedom, you need a buffer for the unexpected life events that happen to all of us, like car repairs, broken appliances and medical deductibles. That’s why you should increase your emergency fund to cover three to six months of expenses once you’re out of debt.
Having the cash on hand to cover an unexpected life event gives you peace of mind and is a critical part of your overall financial plan. Once you have that fully funded savings account, you’ll start to feel more flexibility in your budget. You’ll be able to say yes to shopping splurges and specialty lattes with no guilt at all!
Since you’re not taking on debt, you’ll also need a savings plan for big purchases that aren’t emergencies. Let’s take summer vacation for example. It’s simple! Create a line item in your monthly budget and divide the total amount by the months you have to save. You’re not living in debt anymore, and that means you can enjoy your vacation instead of having a credit card bill follow you home.
With a full emergency fund and a plan to cover big purchases in place, you’ll have the financial foundation to start investing.