Emergency Fund…How Much Do I Need?
How much you need in your emergency fund is very individualized. It can depend on the size of your family, how much debt you have and what your financial goals are. The most important thing about an emergency fund is having one. One of the quickest ways to fall prey to a financial emergency is to be unprepared. Of course we hope that financial, medical and unforeseen emergencies don’t find us. However, it is best to remain realistic that here and there, they will. Most experts will recommend 2-6 months of living expenses in a completely accessible bank account. Below we will go through some of the variables.
Here is a list of questions to ask yourself when it comes to determining how much money should be in your emergency fund:
- Am I only responsible for myself, or for my family (either a spouse and/or children)? If you are just saving for yourself, your overall monthly expenses are likely less. This will lessen the amount you need to save in general. Another factor is with more people, there is more of a need to be prepared. You may feel more comfortable on the low-end if you only have to worry about yourself.
- How much are my necessary monthly expenses? Cut out the restaurant and entertainment budget and look at food, shelter, debt repayments and insurances. Multiply this number by the amount of months you want to have saved up and that will be your ($) number. Electricity = Included. Cable = NOT included.
- How stable is my job and/or additional incomes? If you have worked at the same place for a long time, feel in good standing and you are in a lucrative industry….congratulations! That often implies stability. If however, you have had to change jobs a lot, your company isn’t booming or you work someplace where your income fluctuates (seasonal or sales)…we may call that unstable, or at best, inconsistent. The less consistent your income, the more months you should consider saving for.
- What are my other financial goals? Maybe all you have is a rent payment, utilities, phone and you live well under your means. In this case your emergency fund may not require too much and you may not feel that you need to save up for several months. Part of getting your financial house in order is viewing your income in the context of your other goals. Sitting down your with accountant (ahem…that’s us) or financial planner can help you best understand what your priorities are.
