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Nest Egg – This is the amount of money you should save just in case, depending on your household income

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Your emergency fund can’t wait.

Many people find it difficult to save. It is true that Germans should save more than before during the Corona crisis. But precisely because of the crisis, many people cannot put much money on the high edge.

As a financial planner in training, I’ve learned that the first step to a solid savings plan is to establish an emergency fund. Before you start saving or investing for retirement, it’s best to build a cash reserve for yourself. An emergency fund is money you can access quickly if there’s an unexpected medical emergency, your car needs a new transmission, you lose your job, or some other big, unexpected bill hits your mailbox. For most people, the question is not if something could happen that threatens their financial stability, but when it will happen.

Those who have more money in the bank each month than they can spend, those who have a trust fund waiting to be tapped, or those who are very risk tolerant may prefer to use unspent money in the markets. But here’s the truth: For the average person, an emergency fund is the best defense against high-yield debt. Therefore, they simply cannot afford to take the risk.

How much should you save in an emergency fund?

The benchmark for your emergency fund depends on your monthly expenses and the stability of your income. The U.S. Board of Standards for Certified Financial Planners provides the following general rules:

  • TO single income household should at least six monthly issues save.

  • TO dual income household should at least three monthly issues save.

  • TO single income household with a second source of income should at least spend three months save.

Expenses include fixed and variable costs. In other words, everything you spend in a typical month to support your lifestyle: mortgage or rent payments, car, groceries, credit card payments, etc.

Once you have a goal to work towards, it feels more attainable than just saving a few bucks here and there. You can easily calculate how much you need to set aside each month, week or day to reach your goal. If you can boost your savings with a bonus or tax refund, that’s even better.

Where to invest your emergency fund

Starting from scratch and building a four or five figure savings account takes some discipline. I met my emergency fund savings goal last year with a strategy I borrowed from my retirement plan. To do this, I started treating my savings as expenses and direct depositing my paycheck into a high-yield savings account. I did this at a different bank than my checking account to avoid the temptation to access the account for non-urgent purposes.

From the first day of saving, I never thought about what I would give up to save more. I worked backwards and chose a savings amount that would give me a solid emergency fund in less than two years. Every month I set that amount aside and forced myself to live on what was left.

The beauty of a high-yield savings account for your emergency fund is that your money earns interest while it’s there. Interest can give your savings a little boost: the more you put into the account, the more interest you earn. And most importantly, your money is always there when you need it.

It can seem impossible to save money when you’re balancing other priorities, like paying down debt. But an emergency fund can’t wait. Any amount you can afford, whether it’s $5 or $500, will make a difference. At the end of the day, the most important thing is that you have at least some cash to fall back on in an emergency.

This article was translated from English and edited by Ilona Tomić. You can read the original here.

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