Emergency funds are necessary. We all need to be prepared for those unplanned rainy days. Therefore, it’s not a question of whether or not we need an emergency fund, but how much of an emergency fund we really need.
When speaking with others about their emergency funds, I’ve encountered funds anywhere from a few hundred dollars to tens of thousands of dollars. There’s really no magical number. Everyone’s situation is different and hence, the optimal size of an emergency fund will vary from person to person. Here are some tips to help you decide how much to put into your emergency fund:
The Rule Of Thumb
While there is no right or wrong answer, it is generally recommended that you should save three to six months of expenses in your emergency fund, leaning towards six to be cautious. For example, if your expenses amount to $3,000 each month, you should aim to save $18,000. As you build your emergency fund, aim to put 10% of each paycheck into your fund.
One of the key numbers you need to understand to help build the emergency fund is how much you actually spend. Everybody tends to think of the big numbers, like rent, utilities or food when thinking of expenses, but what about transportation costs? Or even your daily cup of coffee? Be realistic when you are calculating your expenses and try to be as thorough as possible. You don’t want to underestimate your expenses and end up not having enough.
Saving Too Much Could Be Bad Too
On the flip side, saving too much could be a negative too. There is an opportunity cost to having an emergency fund. On one hand, you have cash on hand that you can use whenever needed. However, on the other hand, it’s money you could be investing and in turn, using to build your wealth with. That’s why it’s so important to understand your expenses and plan ahead as much as possible.
Understand Your Situation
Having three to six months of expenses built up in your emergency fund is a good starting point. But from there, you can personalize your emergency fund by understanding your situation. Perhaps you don’t need that much saved up because you don’t have debt or have a second income to fall back on, like your spouse’s or from a side job. Or maybe you need more than six months because your job is on a freelance basis and your income is unstable. Every situation is different so finding the right size fund for you is crucial.
Whether you have saved up enough or not, it’s at least important that you start. Begin building your emergency fund today if you haven’t already. Over time, you can analyze your spending and better understand how much you really need in your fund. Don’t ever delay starting a fund just because you don’t know what number to shoot for.
How many months of expenses do you aim to save in your emergency fund? Why?
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