Any financial expert will tell you that you need an emergency fund. But how much money should be in that fund? Well, that depends on who you ask. Suggested figures range from a thousand to tens of thousands of dollars. That’s a pretty large spread!
As with any financial advice, one size does not fit all when it comes to how much to put into an emergency fund. The right number for you might be completely different from the right number for your brother, your friend, or even your coworker.
Here is some advice and tips to help you decide for yourself how much you should save for emergencies.
These day you should have six to twelve months’ living expenses set aside. In the past most experts would say three to six months’ expenses, but we are now living in more financially uncertain times. To figure out how much that would be for you, add up your monthly mortgage or rent payment, utilities, grocery bill, insurance and any other non-discretionary expenses, and multiply by 6 or 12. This is a good way to get a general idea.
Consider how much debt you have before you start saving. If it’s a lot, it might be wise to build up only a small emergency fund until you get out of debt. Once your debts are paid off, you’ll have saved lots of money in interest, and you’ll have more to contribute to your emergency fund each month.
Think about your employment situation. If layoffs are a strong possibility, you need a large emergency fund to keep yourself afloat in the event that you become unemployed. If you’re self-employed, you’ll also need a healthy emergency fund in case things slow down or you become unable to work. But if you’re in a profession with a high level of job security, you might not need to put away that much money.
Special circumstances might make a difference in your needs. If you have children, for instance, you’ll probably need more of an emergency fund than a single person or childless couple. If you have an older vehicle, you’ll be more likely to incur repair expenses than if you drive a new car. Other things to consider include ongoing health problems, the need for home repairs, and the size of your insurance deductibles.
Take your comfort zone into account. Once you sit down and think about it, the prospect of being caught unprepared when an emergency occurs is pretty scary. How much money do you realistically think will be enough to see you through if you have large unexpected expenses or have to go without income for a long period of time? If the numbers you’ve come up with don’t seem like enough, by all means feel free to save more.
Be sure to read about how Creating An Emergency Fund Is Easier Than You Think for ideas on how to get started.
Emergencies come in all shapes and sizes, and so do financial situations. That’s why it’s impossible to come up with one figure, or even one equation, that tells everyone how much they need in an emergency fund. But if you take a good look at your budget and finances, it’s not so difficult to decide how much you should put away for a rainy day.
Tags: Banking Advice, emergency funds, saving advice
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on Monday, April 18th, 2011 at 8:38 am and is filed under Savings.
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Any financial expert will tell you that you need an emergency fund. But how much money should be in that fund? Well, that depends on who you ask. Suggested figures range from a thousand to tens of thousands of dollars. That’s a pretty large spread!
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