"I'm 19, working full-time and renting. I also have two pets. I'm worried I don't have enough put aside for emergencies. What's a good figure to aim for?"
- Question from Hayden in Kirwan, QLD
Top answer provided by:
Kieren James
Hello Hayden,
This is a very good question for many people, and one of the key starting points of sound financial management. “Cash flow is king” as they say, and it is important to ensure you always have a sufficient cash flow buffer (immediate access to capital) to see you through any unexpected events that may arise. But how much is enough?
Although the answer will be different for everyone based on their individual position, expense requirements, debt level commitments (and pet expenses), I would say an easy rule of thumb would be to try to cover at least 3-6 months of those essential cash flow requirements. That is, if your income suddenly stopped, that you would be able to meet all of your expected expenses for the next 3-6 months without finding replacement income. That would be the minimum to ensure you have some breathing space to deal with financial disruption without being forced into a more difficult situation or having to sell off other assets. For those who are self-employed, facing seasonal income, or have a specialist and limited demand skill set, the need to cover up to 12 months cash flow/expenditure is not uncommon at all.
How do you determine what your cash flow requirements are? Well that comes down to budgeting 101 and cash flow management. ASIC provide a simple and effective budget planner (for free) on their MoneySmart website, which is a great tool to kick things off. Through your budget you will not only determine your specific cash flow requirements (and thus the cash-flow buffer you need), but also be able to identify any areas of excess cash flow leakage (overspending) and work out what level of surplus you may be able to generate. That would then lead to greater medium and long term planning. First things first though – budget planning and cash flow management. For these are the foundations of financial success.
I also commend you for taking an active interest in your financial position at the age of 19. Early starters end up benefitting for a lifetime by establishing correct habits and improving their own financial literacy.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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