How Much Should I Have in an Emergency Fund?
It’s essential to have an emergency fund for when life throws you a curveball. Whether it’s an unexpected job loss or a surprise auto repair, having money tucked away gives you the freedom to cover bills without worry. But knowing how much to save can be tricky. Financial experts often recommend that households save six months’ worth of living expenses. However, your situation might require that you save more — or possibly less.
Here are five questions that can help you calculate the amount you should keep in an emergency savings fund.
1. What are my expenses?
Many people mistakenly believe they must save half a year’s worth of paychecks to build a solid emergency fund. But the amount you need to sock away could be far less. If you need to tap into the fund, it’s unlikely that you’ll be in a position to continue spending on non-essential items like vacations or entertainment.
Total your monthly bills. Only include the amount necessary to pay for essential expenses like:
- Debt payments
- Medical insurance
Monthly expenses that should be excluded from the calculation include streaming subscriptions and dining out. If you experience a job loss or other major financial blow, your finances and lifestyle must adjust to the new reality. The revised expense total should be your baseline for monthly savings.
2. How much debt do I have?
Figuring out how much money you have to work with is another crucial consideration as you determine your savings target. For example, if you have large debt payments, saving three months’ worth of living expenses – instead of six, might make sense so you can get back to focusing on debt elimination. The longer you carry debt, the more you’ll pay in interest charges that could otherwise be used to meet your goals. Plus, when you’re debt free, your financial cushion can go further.
3. Do I have dependents?
If you are the primary income earner in your family or have someone relying on a portion of your paycheck, planning for a larger fund is a wise move. Since you never know how long your income might be affected after a job loss or whether you’ll be able to secure financial assistance while searching for another job, saving six months’ worth of expenses (or more) could bring you peace of mind.
4. Is my income predictable?
Small-business owners, workers with a variable income, or employees who work in specialized fields should consider heftier emergency savings goals. These earners are often more vulnerable to economic changes and may have difficulty filling the loss of income. For example, a freelancer might unexpectedly lose several clients in a short period. A substantial savings balance could be the lifeline needed to survive an earnings dip while actively working to rebuild a client base.
5. Am I planning to retire soon?
While many retirees expect to live off their investments, an economic recession or rising inflation could reduce the amount available to pay bills. Plus, surprise home or vehicle repairs don’t vanish as you get older. Consider a larger emergency fund that could let you cover these expenses and maintain your retirement lifestyle.
The amount needed for your emergency fund savings is the minimum amount needed for you to feel at ease if you lost your income for an extended period. When you have enough money set aside, you won’t need quick reflexes to deal with what life throws your way. Let your savings fund absorb financial shocks so you can recover quickly. Open an account and start saving today!