Your First Step Toward Financial Independence: Saving an Emergency Fund

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I tell clients all the time that you have to have an emergency fund because shit happens. Yes, I wrote it. If you don't have at least three months of what you need to pay for your basic needs in cash at all time then you're not very interested in your own financial stability. During good times, three months savings is generally enough to get you through the typical setbacks like broken cars and unexpected breaks in your employment history. 

During times like these though, three months may be a little lean. The chances that a rough patch could last longer than normal are much higher. Six months might give you a much better and more realistic cushion. 

Of course there are exceptions to every rule. Professional athletes and business owners who are self-employed are in an even more precarious position. MMA fighters never know when they'll have to drop out of their next fight due to injury or if they'll get one, two, or three fights in a year. Self-employed people don't have the luxury of a defined salary and pay schedule. Their inflows can come in large sums and require a much more detailed commitment to planning. 

For those that are in this position, I recommend keeping as much as a year's worth of savings for an emergency fund. This doesn't always need to be in cash, but it should be a liquid asset that can easily and quickly be converted to cash if necessary. 

To figure out exactly how much you need, start by creating a budget. Use your checking, savings, and credit card statements over the last six months to determine where you spend your money and exactly how much you spend on each item. Everything in finance starts with intimately knowing your spending habits. Next, total the cost for housing, food, clothing, child care, transportation, and insurance. The result is the amount you need to cover each month just to survive. 

You may wonder why debt and credit card payments aren't mentioned. If you find yourself in trouble, don't turn to your credit cards for help without first consulting a financial advisor. Using them will only sink you deeper into a bad situation and there may be alternatives yet to explore.