I now have six weeks’ worth of expenses saved. What should I do now?
Assuming that you have a traditional steady paying job, this is a fantastic time to consider setting up a filter account. If you have highly variable income, you may want to consider waiting until you have as much as three months’ worth of expenses set up before setting up your filter account. Two months without income could lead to a world of bounced checks otherwise. The advantage of this is that you begin to capture any bonuses/raises/promotions in savings rather than see them vanish in spending.
I have set up the filter account. Now what?
By this time, you should have paid off high interest debts. Most likely, you should have life insurance and either long term disability or long term care insurance in place. You are making sure that you are taking advantage of any free money that is available from your employer. Only now, would I say that it is probably time to begin thinking about outside investments. At this point 40% of your excess should be going to continue to build your cash reserve and 40% should be going to investments.
I now have 3 months’ worth of expenses. Now what?
First of all, congratulations, you have achieved an important step as it relates to financial freedom. You now truly have a buffer in place in case you lose your job. Chances are that between unemployment benefits, cutting expenses, and your savings you may not have to go into debt. At this point, you can also investigate increasing elimination periods for insurance policies such as disability and long term care which may decrease your insurance premiums. Keep up your savings. You are on your way.
I now have 6 months’ worth of expenses. Now what?
At this point you truly have a substantial buffer and if you have a steady income may now consider that you have an adequate cash reserve. Depending on your age and the variability of your income, you may want to consider either investing 80% of the money (if you are under 50 and have a steady job) or invest 60% and have 20% going to increase short term investments (if you are over 50 and/or have a highly variable income).
What About the Other 20%?
Yes, it is true. I keep on mentioning either 80% or 40% to here and 40% to there (which adds up to 80%) which leaves 20% leftover. The other 20% is yours to do with as you will. Feel free to spend it, give it to charity, etc. In fact, if you are not suffering from high interest debt, I will be somewhat upset if all you do is save it for emergency reserve. This money should be a treat to you.