The standard advice on emergency savings has always been three to six month’s worth of income, which is a massive hill to climb. But when COVID hit, many people discovered that even six months wasn’t enough.
So, what now? Clearly, telling people to save a year’s worth of income won’t help, even though that’s what many needed. Financial planners still recommend at least three month’s of savings, but they also recommend a more diversified income approach.
- To begin, work on paying off debt. With less debt, you’ll have less worry about making your payments if you lose your income temporarily. You’ll also have more to add to savings once you’ve paid off the debt.
- Then look at options for creating a side income. Make that as passive as possible. There is no one-size-fits all strategy here. Some people may invest in dividend stocks. Others may create a side hustle or second job, especially if they have no money to invest. Some may purchase a rental property or carve out a room to rent on Airbnb. There are a myriad of ways to generate an additional income flow. Best to create this while you don’t need it, than to wait until you do.
- Finally, pay yourself first. Set up an automatic payments to your savings account, separate from your checking. If you don’t see it, you may not miss it.