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Last week I read an interesting article on why we should all be putting money not only into a having savings buffer, but also into an emergency fund.
Wait a minute, I thought.
You’re telling me I not only need to be earning enough money to live, but I also need to be earning enough to have spare cash to put into:
- An Emergency Fund
- A Savings Buffer
- A Retirement Plan
Who the hell are they kidding?
Does anyone writing these articles know that nearly every single person in their twenties lives paycheck to paycheck? Most people in their 20s put savings into their account at the beginning of the month only to take it out again a week later!
If there was ever a world where putting your hard-earned cash into three different savings accounts was a possibility before covering your basic rent-bills-mocha-frappuccino, that world is not today.
The more I educate myself on my own finances, the more clear it is that building up your savings is an essential task on the to-do list, no matter how old you are. Living on a paycheck each month is not sustainable, and for many, it’s an easy way to live when we don’t know another way.
It is easy to set up a budget, without even exerting too much will-power. To get you started, I wrote an entire post to help:
For this post, I’ve looked into exactly what each of the Big 3 Saving Sections actually are, and broke down what you should be saving for, and when.
It doesn’t need to be a save everything at once plan – make small, slow contributions and soon enough stashing your cash away will be second nature.
Financial Security for Times of Uncertainty
An emergency fund should have between 3 – 6 months of living expenses in it, according to this article. If life goes up shit-creek (say, you lose your job, crash your car), your emergency fund is in place to provide security in times of uncertainty.
Once you have this amount saved up, you can either keep contributing your savings to the fund, or you can divert your money to a savings buffer or retirement plan comfortable in the knowledge that you have some financial security in place.
Financial Independence for Planned Expenses
In contrast, your savings account is for planned expenses. Once you have your emergency fund set up, your savings can be used for shorter-term purchases such as holidays, new technology, replacing clothes etc that you wouldn’t usually be able to fit into your budget. If you regularly contribute to your savings account, you can make these planned purchases without cutting into your emergency fund for rainy days too much.
Until recently, I treated my ‘emergency fund’ and ‘savings buffer’ as the same thing without even thinking about it. I’ve always had a nice cushion that helps me feel secure should my life take a drastic change (like, I don’t know, going travelling…!). However, separating the two into one ‘do-not-touch’ fund, and one ‘planned expenses’ fund not only gives a far greater sense of responsibility over your money, but ensures that happy savings buffer for fun and a bit of frivolity never dips into the danger zone of financial insecurity.
Financial Freedom for Your Future
Of course, your retirement fund is for when you’re older and not able to work anymore. If your employer puts you on a pension plan where they match your contributions, or if you have very little debt, putting savings into your retirement fund first may be a good option.
Personally, I’d rather have the safety of an emergency fund to protect me for unforeseen circumstances in my present, and then focus on protection for my future, but your situation may be entirely different and allow you to focus on retirement at the same time as focusing on an emergency fund for now.
I should probably mention the big black shadow that follows me, and many other people like me, around…
If you’ve been to University, are still studying, have bought a car on lease, got a mortgage, or taken a shine to credit cards, chances are you’ve got some debt hanging around your shoulders.
It’s very easy to ignore debt, especially when the pressure to pay per month is not particularly high for student debt. However, that interest is always growing. Once I’ve saved enough to have a comfortable emergency fund, I’ll focus the main portion of my savings on paying off my student debt. More to follow.
So what should come first?
Everyone is different – you might be in a lot of debt (hey student loans), you might have none, you could be in a very stable job or you could be working as a freelancer with less security. All of these aspects will affect what you want to save towards first.
As long as you’re thinking about putting some money away rather than spending every single paycheck, you’re already on the right track. Start putting a manageable amount into a savings account, and once you’ve got a better idea of what you can save, take stock of your situation and decide what you’d most like to save for.
Where do you put most of your savings? Do you separate yours into three different accounts, or just put it all in together?