Ok, you have completed the first step of having your emergency fund. You now have $1,000-$2,000 saved in a savings account. The goal of this first step is to prepare you for that unexpected expense (auto repairs, trip to the doctor, home repair, etc.) With that cash on hand, you can take care of these types of issues without having to resort to using a credit card. Pat yourself on the back, first mission accomplished.
Now it’s time to get back to work on your road to financial independence. Your next step is to build that emergency savings account up to between 3 and 6 months of your net income (take home pay). The amount you want to focus on is the amount on your paycheck after all taxes and withholdings are taken out – your net pay. The next step is to convert that into a monthly amount. The table below gives you an easy way to calculate the amount.
| How often are you paid? | Factor | x | Net pay | = Monthly Amount |
| Weekly | 4.33 | x | Net pay | = Monthly Amount |
| Every Other Week | 2.15 | x | Net pay | = Monthly Amount |
| Twice Monthly (15th & 30th) | 2.0 | x | Net pay | = Monthly Amount |
Example 1. Your net pay is $540 per week.
$540
X4.33
$2338 monthly net pay
Example 2. Your net pay is $2,100 every other week.
$2,100
X2.15
$4515 monthly net pay
Use the above formula to calculate your monthly net pay. Next decide h ow many months of pay you want to save in your emergency fund. The minimum should be 3 months. These funds are to be used for serious interruption in income emergency expenditures. The goal is to reduce the impact of an occurrence like that.
That account can be funded from:
- Savings from your regular pay.
- Bonus or commission money you receive.
- Selling seldom used items you own.
Again, a reminder this is not an investment account. This is savings that needs to be in an insured bank account earning the best rate you can find.
Having a fully funded enhanced emergency fund is your first step to becoming financially independent.
Prepare for the unexpected by saving your way.
Leave a Reply