Sometimes there's a surprise trip to the dentist, you need to buy a suit for a wedding or get the engine rebuilt, or all of it at once. You want to rent an apartment and have to pay the deposit, the agent's fee and the first month's rent up front. Do you feel ready for situations like that, and can you sleep soundly?
A great way to manage your money is the 6 jars system, which works well no matter how fat your wallet is:
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55% of your income for necessities: food, housing, transportation, services and bills.
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10% for long-term savings: emergencies, big expenses (e.g. a down payment on an apartment), doctors, the dentist. This is your financial cushion.
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10% for play: eating out, a spa visit, travel, concerts.
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10% for education: books, courses, coaching and mentoring, so you keep growing and increase your income.
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10% for financial freedom: investing in stocks, crypto, real estate, etc. Money you could potentially lose without it ruining your life.
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5% for giving: non-profits, animal shelters, charities, or people around you who are in need, e.g. your parents.
If 55% of your income can't cover your basic expenses, it means you're not earning enough or your standard of living is too high, and you need to make some changes.
The ideal financial cushion should let you get by for at least 6 months without lowering your standard of living if you lose your steady income.
Having quick access to emergency cash will give you a lot of peace of mind and help you solve problems in a crisis. You can also jump on investment opportunities that come up and need quick action and cash.
If your costs are less than 55% of your income, make it a priority to start by building your financial cushion faster. Once you have that safety net, invest your spare money in building financial freedom.
Under normal circumstances, if you put 10% of your income toward it, building a cushion big enough for one month of your fixed costs (which make up 55% of your income) will take you 5.5 months.
A solid 6-month cushion will be there after 33 months, which is 2 years and 9 months.
Simple? Simple!