How much money should you save for your emergency fund? Emergency funds are available money that is ready to use when financial surprises arise and is a key component for good financial health.
What is an emergency fund?
Emergencies or unexpected expenses generally need to be paid right away unless you end up using credit (which you want to avoid).
Medical expenses, necessary home repairs, unexpected car repairs, and losing an income source are all examples of when you might need to use your emergency fund.
Examples of why to have an emergency fund
Example 1
Imagine getting a flat tire and learning that all four tires need to be replaced and your total cost is $1000. This is an unexpected expense and without some available money set aside you might just be adding to your credit card debt.
Example 2
How about if you need some dental work and the insurance does not one hundred percent cover the expense? If you have some money set aside you might be able to cover the difference. Otherwise…it probably ends up on your credit card.
Example 3
What would happen if you lost your job? Would you be able to pay for your basic needs or would you end up using credit or even possibly losing what you have?
Nobody wants to be in any of these situations but unfortunately, it happens. Be prepared with some money stashed aside so that you can weather these storms.
What an emergency fund is NOT
Emergency funds are for “needs”not “wants”. Anything that is not a basic living expense is not considered an emergency.
This money is not for vacations (even unexpected ones), buying a new car when you have one that is perfectly fine, weddings, gifts, clothing beyond what is necessary, entertainment or unnecessary home improvements.
I think you get the idea.
How much emergency fund money should you save?
It is typically suggested that 3-6 months is how much you should have for your emergency fund. Although this is a good starting number there are many factors to consider before deciding what is appropriate for you.
It is really not a one size fits all number. Evaluate your situation and personal comfort level before coming up with how much money for an emergency fund makes sense for you.
Here are some questions to consider:
- How marketable are you in your line of work?
- Are there many options in your line of work for the same or better pay?
- What are your family obligations? Do you have a large family or is it just you? Are you the sole provider?
- What is your living situation? Are you with your parents? On your own?
- Are there other sources of income?
- What are the minimum expenses to maintain your lifestyle?
- What is your comfort level with money? Do you feel secure with more in the bank or are you okay with less?
- What is you risk level for the typical unexpected expenses? Do you have a car to be concerned with? How many people may have medical/dental issues? Do you have pets?
- What is your current financial situation? Debt to Income, Net Worth, does all income go toward living expenses?
Examples
**Let’s assume that your line of work does not offer many jobs for your current pay scale and you are the sole provider for your family of four.
You might want to consider budgeting for an emergency fund that covers at least 12-18 months of expenses since it may take more time for you to find a job.
**On the other hand, if it would be fairly easy to find a job at your pay rate, you are living with a roommate or with your parents and you are only financially responsible for only yourself. An emergency fund that covers 3-6 months of your expenses might be adequate for this situation.
**What if your current job is stable but your income barely pays your expenses. If an emergency comes up, it would be very tight. You may want to think about creating a savings plan for at least 3 months of expenses so that you can pull from that fund and not affect your monthly obligations.
The bottom line is to make sure the emergency fund amount makes sense for your situation. My situation is completely different from yours and therefore my emergency fund amount is different too.
Side note: When calculating your expenses, remember to include irregular expenses. You don’t want to end up using emergency funds for these when they pop up.
How to save for an emergency fund
Now that you know how much to save for your emergency fund it is time to start saving.
Be sure to add emergency fund savings as a budget category and include it when you are creating your monthly budgets.
Save as much as you can
Save any amount you can. If you can only swing $25 per month then save that. Eventually, you can work through your expenses and find creative ways to cut the fat or increase income in order to save more.
Remember your financial goals
Be sure to not neglect your other financial goals. If you are paying down debt then maybe you work toward having a smaller savings of $2500 to start and then go full force on your debt payoff. Again, it needs to resonate with your situation and personality.
Once you have reduced your debt and you have a good handle on your budget you will find that it gets easier and your savings will increase at a rapid rate.
Where do you keep your emergency fund?
It’s best to keep your emergency fund in a savings account. This money is not for investing purposes so the interest rate is not really a big factor. The important thing is that it is available. Once you have a fully funded emergency savings account you can start working on increasing your investment accounts.
Summary
I cannot stress how important it is to have money set aside for emergencies and unexpected expenses. How much money for your emergency fund really depends on your current financial picture, personal home situation and your personal comfort level. Take the time to determine what is important to you so that you can set up the amount that works best for you.
If you are still unsure, then start with $2500 and tweak it from there.
If you have comments ot questions, please reach out. I am happy to help.
Thanks for reading!
Stay balanced,
Jill