When friends or family members broach the topic of how much to save with me, I’m always struck by how emotionally loaded the question is for them. So I launch quickly into the answer: You should start by building up a cushion of 4 months’ worth of living expenses to ensure that you have the wherewithal to handle unexpected expenses, like a broken furnace or a fender bender.
When they hear this, they begin figuring how much their monthly expenses are, and next how long it will take them to save up four months’ worth, and find solace in the straightforwardness of the savings challenge.
I’ll never forget one Christmas when a friend’s son told me he had just recently started selling real estate, and found himself buying TVs, video recorders and other “toys” with his commission checks. He said he knew he probably shouldn’t just be buying things, but since other people “have things”, maybe it was okay.
I told him, “Actually, you’re supposed to be saving. You need about four months of whatever it costs you to live each month to start with.” As we talked it through, he figured out he had very low expenses, something like $2,100 a month. So he said “Alright, so I need around $8,000 in savings. Ok, I got that.”
He calculated how many houses he would need to sell and how long that would take him and he said: “Then what happens after that?” It was clear that getting help setting his goals made them achievable for him and he felt very accomplished just having a plan.