Budgeting / Emergency Savings Funds
Creating a budget and establishing an emergency savings fund are two vital steps when devising a financial plan. A budget is basically a plan for every dollar that passes through your hands. Using a budget will provide more financial freedom and a life with less stress. While there are many different methods of creating a budget, an easy one is the 50/30/20 rule.
First, you need to calculate your after-tax income. We recommend working with an accountant or CPA to best understand your tax bracket and true take-home pay. This amount should go into a checking account with your preferred bank. When using the 50/30/20 rule, for every dollar that passes through your hands, 50% should go towards “needed” expenses (rent, utilities, food, car payment and/or commute costs, licenses, insurances, etc.). These are the expenses necessary for you to work and live. No more than 30% can go towards “desired” expenses (gym, music and television services, online purchases, travel, vacations, and any other extracurricular activities). Desired list items are things you really don’t need but want them in your life. The remaining 20% of after-tax income goes to a separate savings account; preferably one that has no ATM access to it.
Establishing an emergency savings fund is important and should not be confused with the 20% savings from your budget. An emergency savings fund (ESF) is necessary in the event of a catastrophic life moment such as a job loss, a work stoppage due to a pandemic or a disability, or a natural disaster. In fact, an ESF should be established before many of the “desired” list items are paid for, and spending habits begin to grow. The amount one should ultimately work toward having in their ESF is 3-6 months of your income. This amount depends on the elimination period chosen within one’s individual disability policy. While it can be difficult for someone in the early working stage of their career to save so much, having at least 3 months of income on reserve in a separate savings account (and one with no ATM access to it) will assist you in the event you encounter a detour along the road of a practitioner’s journey.
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