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Course: Financial Literacy > Unit 2
Lesson 3: Saving money- Why and how to save
- Why and how should I save money?
- Planned and unplanned expenses
- I am ready to save. What is the next step?
- Saving wisely: emergency fund
- Emergency fund
- Saving wisely
- Saving wisely: planned expenses
- Paying yourself first
- Pay yourself first
- Paying yourself first
- What are different types of savings accounts?
- What is interest and how does it work?
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Saving wisely: emergency fund
Emergency funds are savings specifically set aside to cover unexpected costs, like medical bills or car repairs. They are important because they can keep you from falling into debt or being unable to pay your bills if something unexpected comes up. Created by Sal Khan.
Want to join the conversation?
Is the sun bigger than the moon(16 votes)
No, I guess it's not... sigh I suppose the moon is the center of the universe after all. :/(7 votes)
- These examples are not real life. Today we pay rents of 3,000 or more. There is nothing left to save(11 votes)
Somebody else asked exactly that 9 days ago. Did you copy and repost it? I think I gave a pretty good answer to it then. Have you read that? Why not give it a look. You might learn something.(5 votes)
After the emergency fund goal is reached, is it okay to take a percentage of the savings (like 5% of the 20%) and keep adding to the fund? Or should it go into other goals like saving for college, a car, etc.?(4 votes)- How you go about these things is totally up to you.
Once you have your emergency fund goal reached, you are free to do other things with what used to go into it.
I like your idea of setting up other "funds" with designated purposes. Even funding something frivolous like a weekend at the beach is fine, but don't eat into your emergency fund to do that.
Once your emergency fund is in place, and other life goals seem to be on track, you should not restrict your life to "saving money". Life is here to enjoy. Our savings plans facilitate that. Overfocus on every penny makes you a miser, and you don't want to become one of those.(7 votes)
- Why does this guy look like he's trying to persuade me into giving him my doubloons?(4 votes)
he looks like my weird uncle who always in the corner staring in my family gatherings I'm on to you Gary...(3 votes)
you could also save for a more expensive want(5 votes)- These examples are not real life. Today we pay rents of 3,000 or more. There is nothing left to save(3 votes)
- You are absolutely correct in this. The course may be using a nation-wide standard rather than what pertains to where you reside, especially if you are in a major metropolitan area like San Francisco, Austin, or Boston. As of February 2023, the average monthly rent for a two-bedroom apartment in the United States reached 1,320 U.S. dollars, up from 1,282 U.S. dollars a year before.
I found this information at statistica.com(4 votes)
What happens to your emergency account if you switch banks?(3 votes)- You transfer the balance from one bank to the other. People do this kind of stuff all the time.(4 votes)
@1:30, Sal mentions "after tax income". How do you calculate taxes into your income with local, state and federal taxes?
And on another note, why are there so many taxes? We seem to spend a large amount of income on taxes. Why so?(3 votes)- You can't know exactly for the full year until the taxes are filed. But you can estimate it. If you are in the 13% bracket, for example, figure that for every $100 that you earn, you'll only get $87 into your hand. The rest will be transferred to the government, and at the end of the year, if that was too much, you'll get some of it back. The point is, you can't know exactly how many dollars and cents until your taxes are filed in the next year.
There are so many taxes because that is how the American legislatures think Americans want things to be run. In Canada, it's different. In Europe, it's different. BUT, everywhere around the world where any government provides things like roads, sidewalks, schools, airports, coast guard, police, health care or things like that, money must be collected to pay for all these things. Not collecting school taxes from property owners who have no children means the entire expense of education falls on those families with children in school.(3 votes)
- Question: Do you put your wants into a savings account?(3 votes)
Wants can certainly go into calculation of savings. For example, my spouse wanted a recliner. It was definitely a want, not a need :-) We saved for it for a year, and bought it outright: no credit card, no payments, no hit to the budget.(3 votes)
1:30Video transcript
- In life, there are things that we expect and there's other things
that we don't expect. When we think about it from
a finance point of view, the things that we might expect is, okay, we're going to get a regular
paycheck because of our work and we're going to have
regular payments for things like our rent or maybe our
car payment or insurance. But then there's the
unexpected things that for the most part, most
of us wish don't happen. I guess there could be unexpected
positive things as well but unexpected negative things
are maybe your car breaks down, and that's pretty important
because your car breaking down isn't just a nice to have
thing or nice thing to fix. You probably need your car to get to work and make your money. You might have an
unforeseen medical expense for you or a family member
that you have to pay and it could actually
affect how much income you or your family's able to
get if you have to take off of work because of that medical event. And so because of that,
it is very good to save for a rainy day and have
that emergency fund. Now, most experts will tell you that you should have an emergency fund that's equal to about three to six months
of your needed expenditures. We've talked about the 50, 30, 20 rule, which is 50% on needs,
30% on wants 20% of your after tax income that you're
bringing in for savings. And that savings, first and foremost, should be for an emergency fund until you have a nice emergency fund. And then you could think
about other things. So let's say there's a situation where your needs are $2,000 a month. You know, that's your
rent, your car payment, your insurance, your groceries, the core groceries that
you really, really need. If it's $2,000 a month, then
an expert would say, hey, you need three to six months there. So that would be six to
$12,000 of an emergency fund. If for whatever reason you lose your job, your car breaks down, you have to help out a family member,
then you're going to have some reserves to be able to
weather that actual storm. Now, above and beyond that, obviously it's even better to save and then you can also
think about that as even a bigger emergency fund or
even put it other places. But it's really important to
keep this type of money around. Otherwise, yeah, you could find yourself in a tough situation.