When your debts are paid off, the next step is to save up an emergency fund.
Step 1 : calculate your net worth
Step 2 : create a budget
Step 3 : pay off debt (excl. mortgage)
Step 4 : create an emergency fund
Step 5 : build a financial plan
Step 6 : invest and “stay the course”
What is an emergency fund?
It is important to be prepared for emergencies. If such an emergency occurs, it is best to have a buffer so that you don’t have to go into on debt for unexpected expenses. It is best to choose a liquid and safe place for this emergency fund, such as a savings account.
Unexpected expenses
What do we consider as unexpected expenses? Your washing machine breaks down, your car breaks down or unexpected works at your own home.
You can also use your emergency fund if, unfortunately, you lose your job. Here you can temporarily use this emergency fund for (part of your) living expenses until you find a new job.
If an emergency occurs, it is best to have a buffer so that you don’t have to go into on debt for unexpected expenses.
How much do you save?
The size of your emergency fund is different for everyone and depends on a few factors :
- Unexpected expenses : calculate which material things can break down and provide sufficient resources for this in the emergency fund. For household appliances this is the price of a new washing machine, dishwasher, microwave oven, freezer, and so on. If you own a car, incorporate a budget for repairs. If you already have an older car, also reserve a budget for replacing it. Then you’re good if the car breaks down completely. Homeowners should also set aside a budget for repairs.
- Loss of income : it is important to know whether you have a stable job, where you are less likely to be laid off, or not. Usually, as an employee, budget 3 to 6 months of expenses and as a self-employed person, it is best to budget up to 12 months (or more) of expenses.
What do you do after the emergency?
It’s important to replenish your emergency fund! Put other savings, repayment or investment plans on hold for a while until your emergency fund is filled back up.
The next step on the road to financial independence is to create a good financial plan.
This info is for informational, educational and entertainment purposes only, and does not constitute financial, accounting, or legal advice. Please do your own research (disclaimer).