How to save six months of living expenses

If you've been following this guide from the beginning and have made it so far, you should be seriously proud of yourself. Maybe you've always been used to living paycheque to paycheque, no matter how much you've earned. Or you held on to a false belief that you're "bad with money". 

Well, I'm here to tell you that you're good with money. The plan you used to save up $1000one month, and three months in your emergency fund is the same one that will get you to the final goal of six months. Not very surprising, I know. But the secret to financial success is merely staying consistent with your plan. 

Here's a summary of what we covered in this guide:

  • Round up spare change
  • Sell items that you're no longer using
  • Reduce your monthly bills, such as internet and phone plans
  • Reduce your discretionary spending by being more mindful
  • Start budgeting
  • Automate your savings
  • Pause contributions to all other saving/investing accounts
  • Increase your income by taking extra shifts or asking for a raise at your current job
  • Negotiate a higher salary at a new job
  • Start freelancing on the side, or take up a second job

The last two topics I want to cover are lifestyle creep and what to do after you complete your emergency fund goal.

Lifestyle Creep

You would be surprised at how many people earning 6-figure salaries live paycheque to paycheque and continue to feel that their income is not high enough. This is due to lifestyle creep: the habit of upgrading your lifestyle and cost of living every time your salary increases. It's a cycle that keeps you stuck in the same financial position, no matter how much more money you earn. 

Even worse, some people upgrade their lifestyle at an even faster rate than their income! Buying too much house is the best example of this. 

Next time you get a raise, don't immediately trade-in your car for a newer model. Keep living your life as if nothing changed and use all of the additional income to fund your financial goals, starting with that emergency fund.

Of course, we all want our lifestyle to improve over time. The 1-bedroom apartment you shared with your spouse in your 20s is not the same place that you want to raise a family in. But you need to be mindful about how quickly you upgrade your lifestyle and whether those upgrades are still below your means. 

I have an emergency fund - what's next?

So you've fully funded your emergency fund, and now you have all this extra money to use. That's a good problem to have. It means that you're ready to move on to the next milestone in building your financial freedom - but what exactly is that step?

You can follow one of these two methods: the Waterfall Method or Dave Ramsey's 7 Baby Steps

Here are the basic steps for each one:

The Waterfall Method

  1. Pay off high-interest debt (anything at 5% interest or higher).
  2. Build an emergency fund.
  3. Maximize your employer match if they offer a company-provided investment account.
  4. Maximize tax-advantaged investment accounts like a TFSA or RRSP.
  5. Pay down low-interest debt (5% or lower). Typically this means your mortgage or student loans.
  6. If you complete all of these steps and still have extra cash, consider setting up a regular investment account, or savings account for other goals. 

Dave Ramsey's 7 Baby Steps 

  1. Save $1000 for your starter emergency fund.
  2. Pay off all debt (except the house) using the debt snowball.
  3. Save 3-6 months of expenses in an emergency fund.
  4. Invest 15% of your household income in retirement.
  5. Save for your children's college fund.
  6. Pay off your home early.
  7. Build wealth and give.

Both methods teach you to prioritize financial goals one at a time, building up momentum as you go. Anyone with an average salary and enough time can build wealth following these steps.

If you're on step number 4 and ready to start investing, I recommend opening a TFSA or RRSP account with Wealthsimple. I have been investing with Wealthsimple for 4 years now and can't recommend it enough. What's most important for me is that their account fees are lower than traditional banks, you can share accounts with a spouse, you can consult with their financial advisors for free, and they offer socially-responsible investing accounts. Signup using my referral link and get your first $10,000 managed free for 12 months.

Conclusion

If you've read every post in this free guide, thank you. And if you've left a comment to share your thoughts, you made my day.

I've covered a ton of material based on personal experience and all of the books, blogs, and podcasts about personal finance that I've consumed over the years.

If you feel like I've helped you along your financial journey, there's one thing you can do for me to return the favour.

Share this guide with your friends and family. It might just be the thing that points them in the right direction and inspires them to improve their financial situation.