How important is an emergency fund when you have a well-paying job? Why would a young lawyer need one? These are questions we receive often, and the truth is it doesn’t matter how much money you make – life happens to everyone, and even the most well-paid lawyer today may struggle to pay their bills next month.
An emergency fund can mean the difference between financial ruin and a mild rebound. Life happens to everyone, but the well-prepared recover faster.
Be in the well-prepared group.
Is an emergency fund the same as a savings account?
It’s important to understand the difference between an emergency fund and a regular savings account.
The biggest difference between them is the purpose. An emergency fund is set up to protect you in case you experience a life-altering tragedy. The money in this account should only be used in times of serious emergencies, like job loss or hospitalization.
A savings account is easier to access and can be used more freely. Some people connect their savings account to their checking account and move money between the two for occasions like big trips or shopping excursions.
Both an emergency fund and a savings account can be stored at your regular bank. Some people prefer to keep their emergency fund at a separate bank so that it is more difficult to access the funds. That is all a matter of personal preference.
You’re Finally Making Money. Don’t Squander It.
It’s totally normal for young lawyers, like you, to feel like they won a prize of prosperity after they land their dream job. Those paychecks might seem so large that you begin to live large, believing the paychecks will continue to roll in.
It is a false sense of protection and a very common trap that many people fall into. You start opening up credit cards, buying fancy cars, and your dream house - stretching your credit to its limit, thinking that you will always be able to pay it off later.
Big purchases aren’t always a bad thing, as long as you prepare for the chance that your paychecks disappear.
That’s the beauty of an emergency fund. When you save up three to six months’ worth of income, you will be able to pay your mortgage and car loans even if you become unemployed.
Remember, you’ll keep more of your hard-earned money when you live within your means. Don’t give into the excitement and allure of the fast life. Even if disaster strikes and you have to dip into your emergency fund, the lower your bills are, the more of your money you can keep.
One Thing is Certain: Uncertainty
There is an old proverb that goes, “the more things change, the more they stay the same.” Basically, the only thing you can count on in this world is that life is unpredictable.
Mass layoffs put young families in financial jeopardy. COVID-19 shuts down the economy. Wars create higher gas prices and less spending. Terminal illness racks up hospital bills and wrecks emotions.
There is no way to prepare for every single disaster, but there is a way to prevent disasters from causing more harm.
It’s easy to think that these things will never happen to you, but that kind of thinking opens you up to more damage. Setting up and adding to an emergency fund will help you weather just about any change that might happen in your life.
Emergency Funds Create Opportunity
When you have three to six months of income saved up, you are more able to respond to almost anything that comes your way. All of a sudden, you are more in control and there are more opportunities available to you.
There are way more than just three benefits of an emergency fund, but these are the most obvious ones - the benefits that you’ll notice the most.
Covers Essential Expenses
An emergency fund pays for basic living expenses - mortgage, car payment, electricity, and phone bills.
When those basic expenses are covered, you aren’t stressed about how to survive. You can focus all your energy on recovering and moving on to the next best thing.
A tragedy like a layoff can overturn your entire world. All of a sudden you don’t have the income to pay your basic bills. When you miss payments, late fees and high interest rates accrue, putting you further behind.
You can avoid all of that when you have a padded emergency fund. You won’t miss payments and will reduce the costs by avoiding late payment penalties.
That’s why it is so important to save up enough to cover at least three months of bills. The money you save up will keep paying your bills on time, which avoids costly overdraft and late fees.
Gives You Wiggle Room
An emergency fund also opens up your options and gives you the ability to pivot without feeling like the world fell out from under your feet.
The security of knowing that your basic expenses are being paid lets you take a moment to breathe and create a plan to wisely react to whatever just happened.
For example, if a natural disaster destroys your home, you can use the emergency fund to pay for your living expenses while you work with homeowners insurance and set up a new place to live.
All of that would be a lot more stressful without the emergency fund.
How much should I save?
How much you should build up in your emergency fund depends on your current lifestyle and financial habits.
You want to create enough of a financial buffer so that surprise events don’t completely ruin or disrupt your lifestyle.
The 3-6 Month Rule
Most financial advisors suggest saving up at least three months’ income. If you can save up six months of income you will be creating an even better buffer for yourself.
The idea behind short-term goals is to make them achievable. Saving up three months’ income is usually a milestone most people can reach. Once you do, keep going. Strive for six months so that you will be able to respond to anything that happens.
Helping Lawyers Achieve Financial Freedom
Don’t let disaster derail you from your goals. Treat them like a minor bump in the road and keep working toward the lifestyle you deserve.
When you are ready to set up your emergency fund, contact Power Forward Group. We will set realistic goals with you and help you achieve true financial freedom.