“By failing to prepare, you are preparing to fail.” — Benjamin Franklin
This page is one of the most important pages on the guide as it prevents you from ever adding debt you can't afford. A large amount of debt is the #1 reason that most poor people don't become millionaires .
If you skipped the previous page because you don't have any current debt, let's catch you up. John is now automatically paying $250 dollars a month towards his student debt from his average monthly income of about $1545.
This leaves him with $1295 a month for his monthly expenditures and he's now confused why he needs an emergency fund.
John—and you—need an emergency fund because you never know when tragedy will strike. John and/or you in the next year might suddenly need to pay for a huge medical bill, a car crash, or even deal with suddenly being laid off.
Additionally, an emergency fund will allow John and you to keep automatically investing in the worst-case scenario so that you become a millionaire with or without luck.
For the above reasons and many more, an emergency fund is essential to have. With it, John can rest easy at night knowing that no matter what life throws at him he will be prepared for it. The same should be said for you.
Step 10: Automating your emergency fund
For John, this is what his recommended emergency fund numbers look like:
Since John still lives with his parents and they pay for most of his outings—lucky bastard—he decided to save the minimum amount of $1,500 and complete his emergency fund in two years. That means that John will need to add about $63 ($1,500 ÷ 24 months ≈ $63) to his emergency fund account every month.
Like mentioned before, if you have an unstable source of income or are somehow prone to injury, you should consider aiming for the higher end of your recommended emergency fund amount and to complete it faster.
To make sure that John creates his emergency fund within his timeline of two years, he sets up an automatic transfer of $63 to his savings account from his checking account.
John's emergency fund is in a high-interest savings account so that even as it sits untouched, he still makes money from it.
If you're curious about how he's making that extra cash, go to the
If you're happy with your current emergency savings account, just keep reading!
An early celebration
In about two years John will have his emergency fund completed and in about four years be education debt-free! As you have also set up your automatic debt and emergency fund payments, you can pat yourself on the back for the joy your future self will feel when you are debt-free.
Both you and John are now eligible to automatically become millionaires! Further, no more looking at personal capital or bank accounts. The times has come for that sweet, sweet compound growth.