The financial press is full articles and suggestions that you put as much as you can in your 401k, or other tax advantaged retirement accounts. All this is good advice, unless it leaves you penniless outside of those accounts. Equally as important to your 401k or IRA is your non-retirement savings, the money you can tap without penalties should you need to.
Rest assured, something will go wrong in your life over the next 24 months. Your car might break down. Your relationship may fall apart. You may have an unexpected hospital visit. Or you might be unemployed for a period of time. Just as rains come and go, storms will also hit your financial life. Keeping the financial equivalent of an umbrella handy just seems like a practical thing to do.
Some would argue they have credit cards, and can cover the emergency that way. Using credit will work, but at the cost of high interest in the future. Better to set aside today for what is a known expense tomorrow. Again, it’s not “if” you will have an unexpected event, but rather “when” and “how much”?
How much should you set aside? There is no black & white answer. If you are very young, $100 or $200 a month is probably adequate. The odds of you having a health emergency are typically lower. In fact, most of your expenses are lower. Eventually, you should shoot for having 1 year of savings in the bank! That will take time however.
Don’t have $200/mo? To that I call “bull s@#t”! If I looked at your spending, I will likely find movies, dining out, beer, wine, video games, clothing expenses that are unnecessary nice-to-haves, electronic gadgets, pricey iPhones, etc. Most of this crap is unnecessary, and it inhibits you from the necessary thing of basic financial management. While all these toys may be fun and cool, there is nothing cool about declaring bankruptcy because you mismanaged your money! Save yourself the trouble, and invest in the important thing…..yourself!
At just $200/mo, even with no interest, in 24 months you will have set aside nearly $5000. That’s enough to cover a new set of tires, a new washer or dryer, or a new alternator for the car, should you need it. If you don’t need it, that’s a nice little nest egg you can use to invest outside of your 401k so you can have your money earn money too.