I know you’re on this website because you want to start investing. After all, that’s the name of the website! Well, I want to show you how to start investing but I also want to make sure you start off on the right foot and that means being in a financial situation that is appropriate to start investing.
One of the first things to ensure before you start investing is that you have an emergency fund set up.
An emergency fund is a sum of money that’s set aside and easy to access in case of an emergency. We’ll further define what an emergency fund is and show you how to save for an emergency fund below.
Here are some things that would constitute an emergency in the context of this article:
- Your car has repairs that are unexpected such as leaking struts, blown-out tires, or an oil leak.
- Your house has repairs that are unexpected such as a leaking roof, broken air conditioner, a beehive in your attic (this actually happened to my brother).
- You lose your job. Being without work and having a list of bills to pay can be terrifying if you are unprepared.
- Your pet gets sick. Vet bills can be pretty costly and no one prepares for a dog to get one of those prickly things from the yard stuck in their ear (happened to my dog), or for them to break their leg in a gopher hole while running (also my dog).
You can see from above what an emergency is. It’s not having to pay for an oil change, changing out light bulbs, taking a planned vacation off work, or to buy flea medicine for the dog, Those things should be factored in your actual budget. These are those things that you never see coming and catch you by surprise.
How Much Do I Need To Save?
This is the million-dollar question. What’s an appropriate amount to save? Well, I hate to say it but it depends on the individual as far as a dollar amount but here are some good guidelines to get started.
- How much are all of your monthly bills (add them up because this is important). Don’t miss anything like car insurance, groceries, utilities, or rent/mortgage.
- Once you have that money, multiply it by 3. If you have three months of bills saved up, I’d say you move from the red zone to the yellow zone but are still not in the green.
- Keep saving until you have six months of bills put aside. Once you have this amount, you’re prepared for a suddenly lost job and most emergencies that can come up.
- Keep yourself honest, if you cheated on this number, go back and re-evaluate it. The only one that gets hurt by skipping this crucial exercise is you!
Now I’m not saying you have to have 6 months saved up before you can start investing. I’m saying that having an emergency fund is more important than investing. If you reach 3 months of an emergency fund and decide you want to start investing, have a plan to keep saving also until you can reach that 6-month mark. I’ll cover how you can do that next.
Here’s an easy calculator you can use from NerdWallet, if you’re a little more visual.
It’s easier than you think. The first thing you can do is put money that you want to invest now straight into that fund instead. I know it’s not as fun. Trust me, it’s the smart thing to do.
Another option is to look at your spending. If you make $4000 a month and after all your expenditures, still have $700, you can either put all of that in your emergency fund or you can put part of it and use the rest for something else you want to do.
You should also reward yourself occasionally for having a surplus each month. You don’t have to treat yourself to a new car but you can enjoy a movie out or something similar.
Do you have subscriptions to you Hulu, Netflix, Spotify, YouTube Premium, Audible, and HBO Now? OK, I get it. You probably don’t have subscriptions to all of the above.
In case you were curious, it’s about $70 for all of those services combined each month. Even if you have 2 or 3 of them though, by cutting one, you’d see a difference.
If you cut, for instance, two subscription services, that can be $20/month or $240/yr.
Maybe you have a $50/month gym membership that you forgot about because it’s been 3 months since you last went! That could save you $600/yr.
Lastly, there is a third option. This is probably the easiest of the three. Start putting aside 5%-15% of your paychecks. If you make $3600 a month and get a paycheck of $1800 twice a month, that’s between $90-$270/paycheck. If you just make that part of your budget, you will build up your emergency fund pretty quickly.
Also, once you achieve your emergency fund in this manner, it’ll be like having a little pay raise when you can stop putting into it! Now that’s money you can start investing!
OK, I Have My Emergency Fund, Now What?
Now you have your emergency fund. Place it somewhere safe. I’d recommend putting it in a money market account or a bank savings account. It needs to be easy to access but not so easy that you can just start using it for routine spending. I’d recommend a separate account from any other savings. Preferably a different bank.
You want to be able to get to it when you need it but you also want it to be very intentional that you are withdrawing it. For me, I use a separate bank account that’s online. I transferred money each month after getting paid straight to the other account until I had the buffer that I wanted.
I hope you found this helpful. If so, please let me know below in a comment. Also, if you know someone else that needs to hear the importance of an emergency fund, share this page with them!
Once your emergency fund is set up, you can start investing. If you want to start investing with only a little money, it is completely possible. All famous investors, after all, started with their first dollar!
Eric Baglio has been investing for over ten years and learned a lot of valuable lessons along the way. He has helped numerous people start investing on their own and founded Let’s Start Investing to help anyone willing to learn how to build wealth. His favorite brokerage is Webull and his favorite stock advising service is Motley Fool Stock Advisor.