There are a lot of easy things that anyone can do to ensure that they become a millionaire. But the following is a piece of common sense that almost no one does. If you do it, I guarantee your chances of success go up exponentially.
According to our simple calculation, this common sense solution could make you $3.69 Million Dollars over your working lifetime. Take a look at this screen shot. If you want to manipulate the calculator, you can get your own free calculator here.
If you haven’t guessed by now what I’m talking about, you are going to slap your forehead when I tell you because it really is so simple.
The answer: an Emergency Fund
Yup, that’s right.
Here are 3 reasons why an emergency fund will make you money.
1) Stops lost growth opportunity
The reason we are investing in the first place is because we want to grow our wealth. But if every time you have an emergency you have to sell your stocks, you are missing out on future gains of the stocks you bought. In addition, you will have to pay taxes on the gains you made while you had the stock. I guarantee you will be very angry if you have to sell your stocks to pay for a new refrigerator and then the next week the stock doubles in value.
2) Avoiding high interest debt
Paying for emergencies on credit cards is the absolute worst thing that you can do. Why? Because the average interest rate is 21% and they charge you daily, not monthly or yearly. The average amount that you are gaining on stocks is 12% per year. So in most cases, it is not worth going into debt to hold onto your stocks. It would be better to sell your stocks vice going into debt.
3) Stop stealing from Peter to pay Paul
If you have an emergency fund, it stops the “Paycheck to Paycheck” lifestyle. When you have an emergency fund, you build in a margin for error account. Meaning if something does go wrong, then you have the money to cover it and don’t have to steal from somewhere else in your life to pay for it.
Have you ever heard of Murphy’s Law? It basically says, “Anything bad that can happen, will happen”. It’s helpful to think of Murphy as a person who works as a traveling salesman and his best customers are people who don’t have an emergency fund. He goes door to door and offers you dysfunction and chaos and is looking for people who will give him the most business. Yet when he knocks on the door of a person with an emergency fund, he leaves disappointed because that person is able to defend against anything that Murphy tries to sell him.
It’s just like the “Law of Attraction”. You attract what you are. If you are unorganized, or your life is in chaos, then you attract Murphy and all his dysfunction. BUT if you are organized, you have an emergency fund. Then you attract organization and positive events.
Just think about all the little things that go wrong. The car breaks, the kids have an unexpected school expense, an appliance breaks, you are hit with a medical bill…etc. The list goes on.
With just a little prior planning, you can have money set aside to cover all those things so you don’t have to dip into your stocks or credit cards to cover those expenses.
So How Much Do You Need?
If you are young and in college, you only need $500 set aside.
If you are of working age but are still in debt, you need $1,000.
If you are working, out of debt and trying to build your wealth, you should have 3-6 months of monthly household expenses. Typically that should be anywhere from $5,000 to $15,000. If this is you, make sure you get my Stock Picker so you can take your game to the next level!
You should keep that emergency fund in a separate checking or savings/money market account just so that you are not tempted to take money from it for NON-EMERGENCIES.
I hope that helps.
Please let me know if you have any questions.