The first step to freeing yourself of wage-slavery is to build an emergency fund. Should anything go wrong, an emergency fund should give you time to rearrange your life without having to take drastic – and costly – decisions.
Many people recommend you should have three months’ worth of income saved up in your emergency fund. If you truly wish to throw off the shackles of wage-slavery, I’d recommend building an emergency fund equal to 6 months’ income. This will give you longer to rearrange your life should anything ever go wrong and will be a fine start to building your asset base. You will only become financially free if you can build an asset base to eventually provide you with income.
How Long Will it Take You, Starting from Scratch, to Save Six Month’s Income?
Currently, savings accounts paying a return of about six-percent are easily found. Unfortunately, this will be taxed, substantially reducing the true interest rate. So, let’s say you save the money in a cash mini ISA. You can put £3,000 into one of these every year tax-free and get a true six-percent return.
For Example: Your Income is £20,000 a year
Your annual after tax income is £15,320.54
Six months’ income is £7,660.
Interest Rate = 6%
Amount you need to save monthly to reach £7,660 is:
One year saving plan: £617.90
Two year saving plan: £299.70
Three year saving plan: £193.80
Four year saving plan: £140.90
Five year saving plan: £109.30
At the end of this savings period, you will have completed the first step in your road to financial freedom.