Why Do You Need an Emergency Fund?
- Job loss or unemployment
- Medical or dental bills
- Home repairs
Financial freedom means having enough money to do the things you want to do when you want to do them. Although this goal may seem challenging, it is attainable. But how do you get there? One way is to study the savings secrets of successful entrepreneurs, and emulate their strategies. Here are three worth noting.
Warren Buffet may be worth more than $65 billion, but he’s notorious for living a frugal lifestyle. He still lives in the house that he bought in 1958 for just $31,500, even though he could easily afford an upgrade. He earns the same base salary of $100,000 that he’s earned for the past 15 years, and he eschews luxury toys like yachts.
One of his sage pieces of advice is to avoid using credit cards. Many people use credit to buy things they can’t afford; but doing so creates a perpetual cycle of debt. By living within your means, cash will cover your expenses, and you can spend the money you’ll save on interest payments to purchase more important things.
Living within or below your means allows you to funnel money you don’t spend into a savings account that grows and accumulates interest—which is much better than paying interest on consumer debt.
Shark Tank entrepreneur Barbara Corcoran, who turned a $1,000 loan into a multi-million-dollar fortune, knows a few things about building wealth. She strongly believes that creating a financial plan provides the kind of structure that can help people create and meet savings goals.
The first thing she recommends is having a savings account for the purpose of building an emergency fund. A general rule of thumb is to put aside three to six months’ worth of living expenses. This way, should an unforeseen emergency occur, you’ll have your financial bases covered.
She also suggests that people spend time accumulating knowledge about personal finance, and suggests attending financial workshops, or browsing the Internet to find no-cost resources. That’s a win/win on two fronts: You can receive an education, while continuing to build your emergency fund with the money you’ll save from learning for free.
Well-known author and financial advisor Suze Orman suggests that saving money can be accomplished by cutting out expenses that are wants—”anything you do not literally need to survive”—and focusing on the things you truly need. When you’re about to make a purchase, ask yourself if it’s a want or a need. If it’s a need, buy it; but if it’s a want, just walk away. Then funnel the money you’ll save from skipping the purchase into a savings account.
Becoming a successful saver requires some discipline, but the results will make it worthwhile. By following the above three tips from successful business people, you can continue to enjoy your life — and accumulate more money for your chosen goals at the same time.
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1 Study by T. Rowe Price Retirement Plan Services.