The Emergency Fund: How Much Is Enough?
There is a lot of talk today about Emergency Funds and how important they are to your financial security. But how much exactly should you have in your emergency fund?
What Is An Emergency Fund?
Firstly, for those of you who have never heard of an emergency fund, it is simply an amount of money that you can easily get access to use in case of an emergency. Such emergencies would be losing your job, or needing to pay a large unexpected medical bill.
What Should I Consider When Deciding How Much I Need?
I have read a lot on emergency funds and every commentator (including myself) has an amount in mind when they talk about them. Usually emergency funds are rated by how long you would be able to survive if you cease having any income. I have heard totals of everything from 6-8 weeks, right up to 3-6 months, or more.
Personally, I would feel comfortable with 8 weeks worth of income in my fund. (Incidentally, I don’t technically have an “emergency fund” but I do have what is called an “FU Fund.” You can find out more about the FU Fund in this post.)
But that is an amount I personally feel comfortable with and not one that would suit everybody.
After all, my level of comfort and “survival” may not equate to someone else’s. The basic idea of an emergency fund is for you to be able to meet all your financial commitments and live comfortably until you start earning income again. That is to say, to meet your bare minimums.
Your ability to do this will depend upon many factors, not limited to what constitutes “comfortable” to you, your health, your ability to find another income and how quickly you can do this.
How Much Should You Have In Your Emergency Fund?
Firstly, you need to list how much you would need to meet all your bills, loans, repayments, etc and your basic requirements, such as food, medical, etc.
Hopefully you have created a budget so you will already know what these amounts are. Have a look at your budget and pull out anything that doesn’t meet this “bare minimum” description.
For example, my budget is divided into 9 categories: Rent, Bills, Loan Repayments, Food, Miscellaneous Expenditure, Health Fund, Savings, FU Fund, and Fun Money. Out of these, four are absolutely necessary: Rent, Bills, Loan Repayments, and Food. The others are all optional. That is, they are not essential to my survival. I would probably be inclined to keep the Miscellaneous Expenditure category too as odd expenditures may crop up.
This totals up to approximately 65% of my total income.
Now all I need to do is simply multiply this amount by how many weeks or months I think I would need to find another source of income (for most people this would be how long you think it would take you to find another job.) As I stated before, I would be comfortable with 8 weeks.
If you do the math, 8 weeks x 65% of my income = amount I would need to have in my emergency fund.
If you follow this example, you will find your own total.
How Do I Get Started With This Emergency Fund?
I would recommend opening up a free online savings account that offers you a good interest rate and putting aside some money into this account each time you are paid. Make it a part of your budget. Over time this fund will grow and you will soon have enough to feel more comfortable with the possibility that you may lose your job (or other unfortunate event.)
Last Words Of Advice
This is an EMERGENCY FUND. Not a fund you dip into when you are short one week for cigarettes, food or to pay a bill. This money is something you are putting aside for a true emergency - losing your job, a medical emergency or something similarly BIG. Think twice before raiding this fund. And besides, if you have a functioning budget in place, you shouldn’t need to raid the money in your emergency fund.
Do you have an emergency fund?
Image credit: c.violette.run
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[...] have learned a very valuable lesson this week on why you should have an Emergency Fund (or, in my case, a FU Fund) and how important they [...]