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How to Save
Most of us have been hearing, since childhood, that we need to save our money. Saving is extremely important but it is also important to realize why it is necessary to save and how we should save. Saving is necessary to cover the difference between our expenses and our income. One example is retirement. When you retire your income will usually drop and you will need to utilize interest income from your savings and even the savings itself.
It is also possible that during your working years you’ll need to dip into your savings from time to time during periods when your income drops and/or you need to make a large purchase that exceeds your current income.
None of this is really a revelation. But how do we know if we are saving properly and if we are saving enough? The rules that should be used is as follows:
1) How many months of living expenses will your current savings cover?
2) How quickly are your savings building in relation to your monthly living expenses?
For example, if Joe’s monthly living expenses are $1,000 and he has $8,000 of savings in the bank then he is able to go for 8 months if his income should drop to zero. Clearly, the more Joe saves the longer he can cover his living expenses from savings. The longer he can go the better.
The other thing that is very important is how quickly Joes is saving. If he saves $500 a month then every 2 months he saves $1,000 which equals 1 month of living expenses. This is certainly better than if he if saves only $100 a month because it would then take 10 months of savings to cover 1 month of expenses.
Most financial experts agree that each one of us should have 6 to 12 months of easily accessible savings to cover emergencies and loss of income.
Another very good way to ensure that you can pay your expenses during a period of unemployment or income reduction is to ensure that you have several sources of income. Read the article, entitled True Wealth, to learn about developing multiple sources of income.