Emergency fund

Now what exactly is an Emergency fund? Its some money put aside to be used only during emergencies. That leaves us with 3 questions

1. How much money do you put aside for an emergency fund?
   I recommed money worth 12 months of a person's expenses. So, if a person earns $1500/month & spends $1000/month, he should have 1000 * 12 = $12000 worth emergency fund.
   
   Some people might argue that this is a little too much but I think 12 months worth money is a safe margin. Lets face it, shit happens. We could lose our jobs, our business could be in trouble, you or your loved one could be in a serious medical condition.
   
   I think till a person has 6 months worth expenses in the Emergency fund, he should refrain himself from investing (apart from investing in 401K & IRA). After 6 months, he should invest a major portion towards the Emergency fund & little towards buying stocks and mutual funds. The final goal should be 12 months worth expenses.
   
   Once a person accumulates 12 months worth money in the Emergency fund, he still needs to keep a watch on the fund. The reason is a persons monthly expenses does not stay the same forever. He can move to a more expensive city, have a spouse and kids, have a bigger house. So, when the monthly expenses increase, he should increase his contribution to the emergency fund
   
2. Where do you put this money?
   You should put this money in a savings account that pays high interest, something like HSBC Direct, ING Direct or Emigrant Direct. I use HSBC Direct and I am pretty satisfied with it. Anything that gives you 5% or more is a good option. These online banks are good because they give you a good interest rate plus its easy to withdraw money
   
3. Should you use this money only during emergencies?
   Ideally, yes! As far as possible use only during emergencies. If a down payment for a car or house means an emergency to you, you may use it; thats a personal decision. But I would suggest to start another account for a house/car down payment and leave the Emergency fund as it is!

Formula to be rich!

This is a simple formula to earn wealth

Earning wealth = Money earned - Money spent

where,
Earning money is income earned from job, business, real estate and investments (stocks/bonds/mutual funds)
Spending money is daily/monthly/yearly expenses including house rent, utilities, food expenses, entertainment expenses and all other expenses

This formula sounds very obvious but many people under-estimate its importance. If either "Money earned" or "Money spent" gets messed up, you are in a financial mess. A person might think that Earning money is the only thing that's important but if you have bad spending habits, you wont save any money. Simultaneously a person might spend only a small percentage of his income but is his income is very small, that wont help his cause either

These are some things that I recommend to earn wealth
Money earned

1. If you are working in a company, work hard so that you can get a good bonus, stock options and a salary raise
2. You can also earn some experience in the current company and then start working in a different company that offers a better salary and perks
3. Start your own business.
4. Have an alternate source of income like a money generating website and income from real estate
5. Invest in stocks, mutual funds and bonds.
6. Invest in 401K, IRA as much as you can

Money spent

1. Track your expenses. Many people don't track their expenses thinking that their spending habits are proper but I think that's a big mistake. All of us have some areas where we have bad spending habits
2. Buy Microsoft Money or Quicken to track your expenses. I use MS Money & I am a big fan of it
3. When you identify that you are spending much more that you should on a specific area, make a conscious effort to control your spending habits on that area. If you spend way too much on a Starbucks coffee, you might think of buying a coffee machine & making your own coffee or you can drink the not-so-good but free coffee in your office
4. Take good care of your health. There is no better investment than keeping good care of your health. Do a complete physical check up once a year, visit your dentist and eye doctor once a year.
5. Optimize your taxes. This is the single biggest expense!
6. Make your own lunch. Eating out is expensive
7. Negotiate, ask for a deal; you can save a lot if you bargain plus you have nothing to lose

Finally, realise when not to be a cheapskate. Its foolish not to go to a dentist to save money only to realise later that what could have cost 100 bucks now costs a few 1000 bucks!