<< Chapter 1
Life has a funny way of sneaking up on you. The car dies. The water heater gives up. The boss decides the company needs “strategic realignment”, which somehow always means fewer paychecks. Without a cushion, these surprises turn into financial sinkholes. That’s where your emergency fund comes in.
Think of it as your personal shock absorber. It’s money you stash away only for life’s unexpected expenses, not “oops, I overspent at Costco.” The gold standard here is six months’ worth of essential expenses, things like rent or mortgage, groceries, utilities, insurance, and car payments. Basically, the bills that absolutely must get paid even if the rest of your world is chaos.
Where do you keep this stash? Somewhere safe, somewhere liquid, and somewhere separate from your everyday money. Translation: not under your mattress, not in Bitcoin, and definitely not mixed into your checking account where you’ll “accidentally” spend it on takeout. A high-yield savings account works great. Series I Savings Bonds can also play a role if you don’t mind parking the money for at least a year. What doesn’t count as an emergency fund? Paying off credit cards, an amazing TV deal or anything that requires, “Well, technically…” in your explanation. An emergency fund is for true surprises, not poor planning.
Once you’ve got your emergency parachute packed, the next step is learning how to steer the plane. Enter the budget.
Now, “budget” sounds about as fun as “diet” but a budget isn’t punishment. It’s just a plan for your money. It’s the difference between saying, “I don’t know where my paycheck went” and saying, “I told it exactly where to go.”
Some people like to track every penny with apps. Others prefer simpler guardrails, like the 50/30/20 rule: half your money goes to needs, about a third to wants, and at least a fifth to savings or debt payoff. You don’t have to be perfect, but you do have to be aware. If you don’t know your numbers, you’re flying blind.
There’s no one-size-fits-all. The key is you must know your numbers. If you don’t, you’re flying without looking outside or your instruments and that is dangerous. Based on your financial goals and aspirations, adjust accordingly, especially strive to increase savings and debt payoff.
Now let’s bring in a little math trick. Don’t worry, it’s easy, and no one’s grading you. It’s called the Rule of 72. Divide 72 by your investment return, and you’ll see how long it takes for your money to double. At 10% growth, money doubles in about 7 years. At 7%, it doubles in about 10 years.
Why should you care? Because this makes the cost of small spending visible. Skip the $2 million dollar daily coffee example that’s been beaten to death. Instead, let’s look at lunch. Suppose you eat out four times a week at $15 a pop on your work weeks. That’s nearly $3,000 a year. Invested at 10% over 50 years, that turns into over three million dollars.
If 10% sounds like a lot, the average return of the S&P 500 from 1929-2024 including dividends. We will go more in detail in the Investment chapters. It’s not that you should never drink coffee or eat out. It’s that you should be aware. Small daily habits compound into life-changing amounts.
Compounding is the eighth wonder of the world, or at least the one you can actually experience without buying a plane ticket. It’s simply money earning money, and then earning money on that money, over and over again.
Start early, and the effect is magical. In this example, we’ll take the other more conservative number in the rule of 72 with a return of 7%. If you invest $500 a month starting at age 25 with a 7% return, by 65 you’ll have around $1.2 million.
Now compare waiting until 35 to start. At 65, you’d only have $567,000. Over a half a million dollars is nothing to sneeze at meaning it’s never too late to start investing, but that ten year delay cut your wealth in half that took an additional 30 years of saving. Saving is not optional, it’s urgent. The earlier you start, the lazier you can afford to be later.
Saving isn’t about living miserably or cutting out every joy. It’s about aligning your spending with your priorities. Bring lunch a few days a week instead of all five. Negotiate your bills. Wait to make a purchase when it goes on sale. Automate your savings so you don’t have to rely on willpower. Each little shift frees up money, and each freed-up dollar becomes another drop of water. As you begin to accumulate these small streams of money combine with others to become bigger tributaries and in turn gain more momentum to create a substantial river flow of money.
Saving is the engine that powers everything else in personal finance. Build an emergency fund. Give your money a plan. Respect the power of compounding and remember that small choices today grow into life changing results tomorrow. You don’t have to be perfect, and you don’t have to be fast. You just have to start.
Key Takeaways from Chapter 2
Chapter 3 >>