The rainy day is here. The S&P500 dropped over 20% in the past few months, and the recession is upon us. Since the last recession in 2008, Americans have been accustomed to lifestyle inflation and enjoyed the fruit of a booming market. A recession is when the GDP declines in two consecutive quarters. There have been many recessions throughout the history of America. For the first quarter of 2022, the significant sell-off in the stock market has taught us an important lesson: Everything that goes up must come down. In general, the average length of a recession is three years. Meanwhile, the federal rates and the inflation costs are going to skyrocket. It is now even more important to save up in case of the market continues to decline. The investment rule has to start with building an emergency fund. Here are why an emergency fund is critical in your journey of developing wealth.
1. Cover for rainy days for up to 6 months.
In a high inflation market, an emergency fund can help pay for any unexpected cost of living. You never know what is going to happen to you or your family. You may need extra money to fix your car. Or you may get sick and need money for your health. Every millionaire and billionaire starts their fortune by setting up a saving habit. The trick is to start saving as soon as you receive the money, or better yet, have the money automatically deposited into your retirement account so you don’t see them. Most employer offers the option of a 401k match. Make sure to take advantage of it. I recommend saving 20% of your earnings and scaling up until you start saving 95% of your total income. After all, if you cannot manage one thousand dollars per month, you will not be able to handle ten thousand dollars per month.
2. Emergency fund gives you a sense of security.
Emergency funds give you a sense of security to feel comfortable investing your money. Do not be afraid of investment. I wish I had started when I was 18 years old. If you are reading this, most likely, you are still working towards your financial goals. If you are under the age of 40, you have time on your side, and you should invest as much as you can. Start thinking about diversifying your investments. On average, millionaires in the United States have seven income streams: high-income skills, real estate, stock market, cryptocurrencies, etc. Take risks, and this is the time for you to make the big jump. That is why we need an emergency fund. If you lose your investment, you still have enough money to survive.
3. It helps you to build a habit of saving.
Saving is an important habit to reach financial freedom. Although you do not make money by keeping the money in the bank, the power of saving comes from developing a practice. You cannot let lifestyle inflation catch up to you. Everyone can learn a high-income skill that makes you a millionaire. If you do not know how to save and invest that money, you will never reach financial freedom. Start small by saving 10 to 20 percent of your total income, then increase it by 10 to 20 percent every three to six months. In my experience, people who do fail financially despite a high-earning career are most likely due to lifestyle inflation. Skip that weekly outing with friends. Start thinking about how to set up a side-hustle. You will be thankful ten years from now that you did.
4. Jumpstart your career with an emergency fund.
An emergency fund can help jumpstart your career. Good business people know that very well. A good deal does not come regularly; we quickly grab onto them if we find one. An emergency fund helps you to do just that. It provides you with quick liquid money that you can use in a heartbeat. If you invest your money into stocks and real estate, it can be very illiquid, meaning that you will not be able to use that money readily as you may have to sell your investments. Selling these investments may take days to weeks. An average turnover of real estate takes about 45 days. As you can see, an emergency fund can help you to secure those deals quickly.
5 It is the first step toward financial freedom.
Last but not least, it is the first step towards financial freedom. All wealthy people have a proper habit of saving. They always have a backup plan. They have money on the table to ensure they don’t fall behind. Therefore, an emergency fund is one of the most important initial steps of your financial journey. If you can save at least six months’ worth of expenses, you will be able to manage a corporation that is worth millions of dollars.
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