You’ve most likely heard many variations of answers when it comes to the question of “How much should I have in my emergency fund?” From $1,000, to six months of expenses, up to a year, and anywhere in between. These answers vary from person to person, so it’s hard to know which amount will be right for you.
We’ve come up with some guidelines for you to evaluate your situation and figure out just how much you should have saved in your emergency fund before taking the next steps towards financial freedom. Check them out below!
What is your living/family situation like?
The first thing you’ll need to consider is how many people you’ll need to support should you have to rely on your emergency fund for a while. If it’s just you, obviously you’ll need less than someone who is married with three children, or who has their elderly parent living with them. Keep in mind that the more people you have to support, the less your emergency fund money will be spent on you directly.
How do you pay for your living arrangements?
Do you have a mortgage? Do you rent an apartment? How long do you want to be able to make payments before going to work again, should you lose your job or have medical leave or maternity/paternity leave? Are you paying for it all yourself, or are you splitting payments with someone?
Do you own a vehicle?
If you car is your primary source of transportation with no options of biking, walking, or public transportation, you need to take that into account when building your fund. If your car breaks down, you have to be able to fix it as soon as possible so you can continue to go to work.
How much do you spend each month on bills?
Similar to how you assess your living payments, figure out how much you pay monthly on bills. Are there any bills you could negotiate to a lower monthly rate? Are there any recurring subscriptions that you could cancel (whether you’re even aware of them or not)? Do you split costs with anyone? Knowing how much goes out each month will help you figure out how much you can put into savings each month, and how much you’ll need to live three-to-six months without worrying about extra income should the situation arise.
How much do you spend on extra expenses (non-necessary)?
Ah, here come the worst part. We all have to have our vices now and again, but how often do you indulge? Those daily coffee runs can add up, so see where you can cut back. After that, figure out how much this monthly cost is, and figure out if you’ll be able to spend that much after you put away your monthly savings contribution.
Do you have savings already?
Perhaps you have some money tucked away already, but you aren’t quite sure what to do with it. Figuring out a goal for your emergency fund helps give those dollars just floating into accounts a job to do. Plus - you’ll have a cushion already, and you’ll be that much closer to hitting your goal and taking your next financial steps.
Do you use healthcare frequently?
How often you need to visit the doctor and dentist will drastically affect your emergency fund. Make sure you have enough saved to cover any co-pays, medication, and hospital visits should an emergency arise.
Do you have debt to pay off?
If you do, hopefully you’re already making monthly payments. Make sure to figure out how much you can pay if you need to rely on your emergency fund to cover costs. That being said, don’t dip into your emergency fund to pay for debt if you don’t have to. Ideally, this account should be used for last-minute emergencies that may come.
Do you expect a major financial crisis to occur in the next year?
Obviously, it’s hard to predict financial crises, but if you feel as though you may have to make a big payment (for example, you have a feeling your car will break down for good and you need solid transportation), it’s good to trust that intuition and budget accordingly. Hope for the best, but expect the worst (or at least, prepare yourself for it).
What number are you comfortable with?
All in all, it really depends on what number you feel you’ll be comfortable living off of for an extended period of time. Ideally. you won’t need to use your emergency fund hardly ever, but it’s good to have a solid number and time frame should you end up in that situation.
Still not sure how much you should save? Contact us for a free consultation, and we’ll be able to tell you exactly what you should do!