After dealing with bad debt, saving for emergencies and saving for future investments is the next step in the construction of the bridge to financial freedom.

This bridge has three main components, the foundation, the substructure and the superstructure. Saving for emergencies is part of the foundation of the overall financial freedom strategy.

Saving for Emergencies and for Future Investments

After addressing debt, it is time to save money and establish insurance protection, in case of an emergency.  This necessary to prevent getting back into deb if unforeseen circumstances arise. The key is to save as much as possible.  I’ve seen recommendations for savings ranging from 10% to 40% of income.  I have also seen recommended emergency amounts equaling 3 to 6 months of expenses.

In order to truly be successful in this area it is necessary to develop and utilize a simple budget. If you read the ‘Dealing with Bad Debt‘ article, you may want to skip the section below, which touches on budgeting.

Budgeting Simplified

In simple terms, a budget summarizes income and expenses over a period of time. So, the first step is to write down the monthly income. And the next step is to list monthly expenses. See example below from familybalancesheet.org.

Perhaps one of the biggest things people struggle with when developing a budget is that they don’t know where they’ve spent their money. Obviously, tracking expenses would be very helpful, but if nothing else, let’s start by identifying the biggest expenses.

I am a big fan of the 80/20 rule. In short, this rule of thumb states that 80% of the results are attributable to 20% of the causes. With this in mind, we should focus our attention on the largest amounts (or about 80% of expenses). Everything else is much less important, but there is nothing wrong with adding more detail.

Once you have identified the largest categories, then see if there is a way to reduce those expenses. And then establish a budget for each category. Like I said, this doesn’t have to be a complicated process. You can certainly add more lines and more detail as you see fit.

Last, add up all the income and all the expenses to see if you are in the positive on the negative. Then revisit the expenses to see if there is anything that can be further reduced. Any amount left over can be used to pay off debt faster and/or for savings.

Protecting Your Money from Inflation and Putting it to Work

After a given amount for emergencies has been funded, and while the savings momentum is still going, it is wise to continue saving for future investments.

However, keen investors should consider that keeping money deposited in the bank is not necessarily the best idea. There are two reasons for this. First, money is always depreciating. Second, money in the bank is sitting idle, rather than working.

With this in mind, keeping some savings in inflation proof assets such, as gold and silver, can provide some protection. Gold and silver may also provide upside potential, provided the precious metals market is undervalued. The article titled ‘Reasons Why You Should Own Gold,’ provides additional information.

Moving Forward – Insurance and Investing

As mentioned earlier, after having dealt with bad debt and having established emergency savings, it is important to continue to save for future investments. But just to be sure, this is also the time to make sure you have proper insurance protection (i.e. renters insurance, car insurance, medical insurance).

One of the worst things that could happen is to not have proper insurance coverage when an unexpected event takes place. Any such situation could take you back into debt in flash.

Assuming you do have proper insurance coverage, then the next step in constructing the bridge to financial freedom is to invest in growth assets. In this stage, my preference is to stay away from stocks. Mutual funds are slightly more appealing to me, as a temporary investment before getting into bigger and better things.

There is a lot to cover when it comes to mutual funds. As such, I’d have to address this separately. But, I look forward to writing more about this in the near future.

As always, please drop me a note and let me know what other areas of business and finance you’d like to explore. Then, I’ll write more about your suggested topics as we pursue knowledge, financial success, and financial independence together. In addition, you can also follow me on Twitter at @Cash_Keen