The Importance of a Financial Reserve Fund


This is a guest post by Kelley C. Long.  She is a a nationally sought-after personal finance expert.  You can find and follow her on her KCL Money Coach website or at @kclmoneycoach on Twitter.


I believe that having the choice to pursue Career Plan B without a sense of desperation or urgency is the epitome of financial security. We all know people who are creating Plan B because they were forced to by the current economy. However, what about when you choose to pursue Plan B?

The Importance of a Reserve Fund
Image courtesy of patpitchaya /FreeDigitalPhotos.net
 
Even if you are 100% happy in your current role, knowing that you are there because you choose to be and not because you cannot afford not to be is hugely freeing. Moreover, if you are not happy in your current role, having a Plan B to work toward can make the daily grind much more tolerable.
 
For example, a common dream I hear from young women is a desire to quit the rat race and become a yoga instructor, even for just a couple years. This dream is often cast away because it would mean a significant drop in pay and many women cannot imagine trimming their lifestyle to the reduced income. What they forget to account for is an increase in job satisfaction that makes up for the loss of money. And the cut in income does not have to be as great with proper planning and saving.
 
 
Monetize the Change
 
The most significant step you can take toward achieving career Plan B is to monetize the change. In other words, how much will it cost you to change careers, and can you save some money in the meantime to negate that cost? In the yoga teacher example, the training costs are relatively minimal and earning your yoga certification is something you can do while still employed full time. 
 
The real cost will come once you start teaching full time and experience a drop in income. If you do the math and figure out how much money you'll need to plug the gap between your current lifestyle costs and the income you'll earn as a yoga teacher, you'll know how much money you need to set aside to get you through the first year.
 
If your new career requires something more substantial like a full-time masters degree, you need to research the cost of a degree in addition to the costs you will incur to live through that time without your income. Then you'll need to know what kind of income you can expect to earn once you've completed your degree to evaluate whether the trade-off is worth it.
 
Once you've figured out how much Career Plan B is going to cost, set a date and figure out how much you'll have to save per month to get there. It is also useful to calculate how much a "day in the life" will cost you. Then when you find yourself grappling with splurging on something that might compromise your goal, you can simply ask yourself, "Is this _____________ [handbag, pair of shoes, etc.] worth putting off my yoga dream for another day?" 
 
You may be surprised at how quickly you can get there. And even if you never exercise Plan B, having it and knowing that you can do it will make Plan A all the more acceptable.

Question:  Are you saving to make a change?

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