So I have a friend, let’s call him by the initials of his nickname – TM. He recently received a job offer – congrats to him for sticking to the job hunt and being persistent – that he is really happy with. The job pays well and has great benefits. TM has yet to start working, and is a recent graduate from grad school. During the time that he was a student he was essentially broke and really did his best to live frugally and not spend his money unnecessarily. Over the next month, before he starts working full-time, he expects to incur some expenses that are necessary for his career path. In order to pay for these expenses, he borrowed the money he needed and a little extra for living expenses to hold him over until he is paid from his new job.

This all seems fine, and you might wonder why I am bothering to tell you this story. The problem with this story is when TM began to spend the money that he borrowed along with his small personal savings. Although he knew that he should not be spending money that he did not have, he believed that it would not be a problem because he now had a job to pay for the new expenses. I have no problem with a little increase in spending if you have an increase in income. However, TM has yet to even begin his job. He is spending money that he does not have and even worse, he is assuming that he will always have that job. You can never predict the future and for all you know, your income stream could end tomorrow. Never spend money that you do not have. Those who spend their bonuses or paychecks before they even get them are just asking to be put in a difficult financial position.

TM’s story not only shows that you should be careful of excessive spending before you have the money, but also that emergency funds are important. Everyone should have an emergency fund that can be used for living expenses in the event that you lose your job or are no longer able to perform your job.

This poses the question of how large an emergency fund should be. There is no correct answer to this, but I believe it should be at least equal to 6 months of your salary. I actually think it is better to have this number tied to the level of unemployment. For each percentage of unemployment, you should have one month’s worth of salary in the your emergency fund. For example, the current rate of unemployment is close to 10% so I would suggest 10 month’s worth of your salary in this fund. This might seem like a lot, but if you think about how hard it could be to find a job in this economy, it makes more sense.