How much do I have to save?
The amount you should be saving should not depend on your age. Instead, savings should be based on your spending habits, income, and absolute dollar amount. If you have been spending all your allowance/income every month and haven’t been saving much, it’s not too late to start saving and managing your finances. Your future self will thank you for doing so.
An emergency fund acts as your financial cushion in the event of unexpected loss of income. As a general rule of thumb, your emergency fund should help you cover 3-6 months of expenses, but it ultimately depends on your personality, i.e. how cautious you are in preparing for rainy days. Accumulating an emergency fund should be the priority for everyone, even before investing and saving. Here are some guidelines to help with setting the rules for your emergency fund:
1) Define what is an emergency to you.
No, the new iPhone is not an emergency. Even if your current phone is not working, it is still not an emergency. You may need a new phone, but it should not be bought with money in your emergency fund.
2) Will it cost you more to pay later?
For instance, if you have a credit card debt, you’ll be better off paying it with your emergency fund first. However, do not use it as an excuse to spend with your credit card and pay off the credit card bill with your emergency fund!
Remember that at the end of the day, you must top-up your emergency fund back to as it was.
Where should you park your emergency fund in?
High savings interest account
Your emergency fund needs to be very liquid (accessible at any moment you need it), thus it should be parked in a bank account that you are able to withdraw from anytime. At the same time, you should maximize the returns of your emergency fund when you are not spending it.
You can consider putting your emergency fund in a cash management account, accessible on various robo-advisors. These cash management accounts usually provide higher returns compared to typical savings accounts with banks. However, the liquidity is lower and it takes up to a few business days to withdraw from your emergency fund.
Here are some robo-advisors that provide cash management accounts at no cost:
Even if you’re a student, while it may seem like an emergency fund is not necessary, having one helps you practice the discipline in maintaining it. How much emergency funds you should set aside really depends on your expenses and your current life stage.
For example: I spend $600 a month. Based on the general rule of thumb, I should have $3,600 in my emergency fund. But as a student, I might not need as much in my emergency fund, and adjust it accordingly after sorting out what I need to spend on every month.