Have some emergency money in the house, enough to pay for necessary groceries and medication if the banking system went down and you had to pay cash. You can also think of it as “refugee money.” If you needed to evacuate NOW, how much cash would you want for travel costs to far away family? Gas, hotels, meals on the road? Have that much in small bills and rolled coins. (We like rolls of dollar coins for this.)
Rainy Day Money is an escrow account for all the stuff that doesn’t happen regularly, but DOES happen. Car repairs, summer camp, winter heating bills, household appliances. Over a year what would you expect to spend? Put this in your savings account. You will be using something from it each month, but you won’t find yourself being stunned that Christmas came again. A few minutes of thinking about intermittent bills can be a big help to your budget.
Catastrophe Money is six month’s of living expenses. If no catastrophe hits, this becomes retirement money. A Roth IRA is a fantastic place for this, but a Health Savings Account (HSA) may be a good choice if you are eligible for one.
Saving for Your Next Car
Do you have a paid-off car? Start a savings account for its replacement, and fund it each month with the amount you think you would budget for a car payment. Your car just used up one month of its life. If you don’t put money aside to replacement then you are saying “the future is so bright that it can afford to pay for past consumption – plus interest”. Maybe true if you are twenty-five. Probably not true if you are fifty-five.