Welcome back! Let's say that after you pay your mortage/rent, your bills and all of your monthly groceries, you have 500$ left in your bank account (or whatever amount that you have, it doesn't really matter, as long as it's not negative 😀). What should you do with this money? Should you buy that nice watch that you've been wanting for a while now? Should you save this money? Maybe it would be best to invest it?
Here are, from my humble opinion, the most important decision factors to consider:
- your health - this is the most important thing!
- your age - time is the only thing that you can never get back! Money comes and goes, time is LIMITED! Also, we don't know how much of it we actually have.
- your current responsabilities - are you single or married? do you have kids? do you have to take care of your mom? etc.
- your primary income stream - is it stable or very volatile? in other words, do you have a stable job / business?
If you are single, with little or no major responsabilities and your health is not at 100% you SHOULD definetely take care of yourself ASAP - one of the biggest mistakes people do is not looking after themselves. Neglecting a small problem today can lead to a much more serious issue tomorrow.
I'd argue that even if you have kids and are single or not, you should still try to prioritze your health if you know there's something off. I get that kids are our biggest responsability - I am a father so, I know; but if your health fails and you can no longer take care of your familly, well, that's BAD.
Also, it should be clear that if you are healthy but your loved ones (spouse/kids/parents/whoemever you love 😀) are not, that should be the top priority.
Now, let's look at your current savings - if it's 0, I'd suggest creating an emergency fund as soon as possible. As we all know, sh*t happens and it's best if you are prepared for unexpected expenses; these can be anything from your car needing new shock absorbers, your AC breaking, one of your bedroom's windows cracking or being fired from your job. Bad things happen, and if you're not prepared, you'll have to go into debt to sort them out.
So, if you have 0 savings, those 500$ or w/e amount you have left at the end of the month, should go to your emergency fund. In my opinion that's the smartest thing you can do with your extra money.
The obvious question here is: "How big should this emergency fund be?"
Well, this depends a lot on you and the things that you have/own. A relatively safe bet would be to have at least 3 times your monthly take-home income. If you are married and have a kid, I'd suggest going up to 9 or 12 times your current net salary.
Some of you might say that it's dumb to keep this much money in savings. Why not invest more? How about upgrading your car?
The point of the emergency fund is that you have that money, at the ready, whenever you may need it. It's like that good ol' friend that you know you can always count on no matter what.
You can not sell off your investments and cash out your money in less than a day or so.
Sometimes, depending on the state of the market, you may not even be able to sell your stocks - for you to sell a stock, there must be someone else available to take the other side of that deal, a.k.a buying that stock from you.
Oh, if instead you considered upgrading your car ... best of luck to you should you be forced to sell it off in a day or two and get a relatively good price for it.
So, I hope it's clear why the emergency fund is so important to have and should be the destination for your money that you have left at the end of the month.
As a suggestion, you can open a savings account at your bank and get some interest on this saved money - btw, this savings account should be FREE for you to open and should not have any hidden fees/commissions. If it does, find yourself another bank 😉
However, I do strongly recommend you have some cash set aside as well. There's the famous quote from Henry Ford "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.".
Needless to say, the above holds true to this day; I'll go deeper into this subject in another post.
To conclude this first part, in my humble opinion, I think that it's best to first take care of yourself and your loved ones, health wise. If that's covered, but you don't have an emergency fund, this is the best thing to invest your money into.
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