It’s no secret that since the recession hit, the financial situations of many Americans has been deteriorating. Not too long ago, finding a job was not that big of an issue. Now, according to the Division of Labor Force Statistics, it takes many Americans more than 12 months to find a replacement for their lost job. As a rule of thumb, it takes 1 month per every $10,000 of your lost salary. If you were earning $30,000 in your previous job, it will most likely take you close to 3 months to find another job.
Since many who lost their jobs had no “safety net” in terms of savings, too many had to resort to credit and cashing in their retirement accounts (with a hefty penalty, I must add) in order to make ends meet. As a matter of fact, two thirds of Americans who lost their jobs are tapping into their retirement funds in order to find some immediate financial relief; that’s according to the recent study by Transamerica Center for Retirement Studies.
Life happens, job loss happens, health-related emergencies happen. It’s not a matter of IF, it’s just a matter of WHEN. So how can you start preparing a safety net in order to be able to respond to life’s unexpected turns?
After building your initial $1000 emergency fund, your next step should be to live on your last month’s income, which means, having one full month of living expenses set aside.
For those of you who have never been good at saving, living on last month’s income may seem like an unachievable task. Let me assure you, it’s not only achievable, but depending on how disciplined you decide to be for a season, you may be able to reach this goal sooner than you think. So let’s get you started on building your 30-day financial buffer.
Why a 30-day buffer?
The main reason for having 30-days of living expenses set aside is to limit your chances of falling back on credit in case something were to happen. Knowing that you have a full month of expenses to tap into will also give you much needed clarity of mind while considering job replacement options. Instead of making rush emotional decisions based on fear and uncertainty, you’ll have that financial margin to pause, take a step back, seek wise counsel and then decide what your next step should be.
Source: Crosswalk | Megan Pacheco, Finicity