People are often confused about how much money to save for emergency fund because there’s no tell of the unfortunate things that may happen next. Some people call it emergencies, while others call it accidents, incidents, disasters, and even bad luck. Whatever the name is, it is unpredictable. If you aren’t prepared, they may hurt your finance and derail you from your stability. You don’t want your cash flow to be affected, do you?
The Concept of Emergency Funds
As the name suggests, emergency funds are the savings you have for emergencies. You may underestimate its function now, but it can really save your finance in the event those emergencies happen. That’s why people in the old days often said, ‘Saving for the rainy days which means that you should set aside your income to be prepared for the unpredictable and the unknown.
However, knowing the exact numbers of how much money to save for emergency fund can be a challenge. Will it be too little? Will it be too much? Do I have enough on my own to manage my life? You don’t want your saving purpose to hurt your everyday activity and finance, after all. So, how much should be enough?
Well, in the standard financial point of view, you should save between 3 and 6 months of living expenses. This is the standard ‘rule’. However, some financial experts even advise on saving up to 12 months of expenses, especially on certain circumstances. Sounds like a lot, right? Well, the good thing is that you won’t have to do it at once. Start slow. At least you need to build your saving first and then start from there.
Here’s what you need to know how much money should you save for an emergency fund:
- Although most financial experts suggest having 3 to 6 months of expenses, it’s possible that you may have to prepare more.
- It would be best (and wiser) if you can manage a smaller emergency fund while still paying off your debt
- In the event your job is ‘safe’ and you don’t have many expenses, it’s possible to save less
- If the job isn’t exactly secure and you have to deal with more expenses, then it’s safer if you save more
- Don’t target big when it comes to saving. What’s important is to develop a habit (of saving) first. It’s better to do it consistently and continuously than doing it big in an inconsistent manner.
What Should You Know about Emergency Fund?
So, How much money do you have to save to have an emergency fund? Again, many experts have suggested the ‘3 to 6 months’ rule. But this isn’t for everyone. You probably would have enough with this rule if:
- You are healthy
- You don’t have debt; or at least, not much
- You live in a low cost area where the living cost is low
- You rent a house
- Your car (if any) is reliable
- You won’t find any difficulty finding a job if you lose the current one
- You don’t have kids or any dependent (which includes pets) that relies on your income
- Your job is quite stable, not involving too much risk
- You have a partner (or other family) that you can positively rely on for any financial assistance (if any)
For some people, it would be best if they can save up 6 months of expenses. This is especially crucial if:
- You live in a high cost area where the living cost is pretty much higher
- You have to struggle or meet with difficulty of finding a new job in the event you lose this current one
- You have your own house, especially if it’s an older type
- Your job isn’t stable. For instance, you are an artist, a gig worker, a seasonal worker, and such things alike
- You have kids or pets. Your spouse is a stay at home type and you have other people that depend on your supports
- You suffer from a medical condition. You also do high-risk activities, like BASE jumping or rock climbing or extreme sports.
- You don’t have enough (or strong) financial support network.
How much money to save for emergency fund for a year’s worth of expenses? You should do it if:
- You are closing to retirement or you are retired
- You have quite high income
- You are the only provider for multiple dependents
- You have a specialized job or a nice position that may take extra time for replacement (or it may need relocation)
Many people are basically a blend of these things. However, if you view that your risks are bigger than the safe net, it would be wiser if you save up more than less.
How to Build the Emergency Fund
After you know how much money to save for emergency fund, it’s time to calculate how much you should start. There are steps to make everything easier.
- Set your own saving goal. You should determine how many expenses months that you need to save (between the 3 and 6 months). The decision should be based on your own risk factors and personal circumstances.
- Calculate a month of expenses first. When you calculate expenses, only include the things that you still have to pay for emergency, such as bills, groceries, and rent. Don’t include optional and extra expenses, such as dinning out and travel.
- Calculate the amount of your own saving goal. Multiply the monthly expenses by how many months you are aiming on saving. For instance, let’s say that you want to save 4 months of expenses. You’re a month expenses is generally $2,000. It means that your target fund would be $8,000 for the emergency fund (taken from 4 x $2,000)
- Automate the savings. Your chances of succeed would be bigger if you automate the savings. Determine how much you can save each month without affecting your regular spending. Then, set auto deposit up, from your checking account to your saving account. Each time you get paid, the money would be directly sent to the saving account to ensure that your saving is secure.
- Make use of any saving opportunity. In the event you come across other earning, like getting $20 parking lot bill, extra income, or tax refund, make sure they go to your fund’s deposit so you can reach the goal sooner.
Saving isn’t easy, but don’t give up even if it looks difficult. You don’t need them all right now. It’s safer to think of your saving funds as a continuous and an ongoing process, just like the retirement saving account.
So, what happens next once you have reached your goal? Once you have figure out how much money to save for emergency fund and reach the goal, the next thing is up to you. For some people, they may create another saving fund with another goal. For another, they may continually save up money but with less amount of money. For others, they still keep on saving – not making changes at all. After all, there is nothing wrong with saving. It’s always great to have extra saving rather than not having anything at all.
Other Saving Alternative Schemes
The ‘3 to 6 months’ rule is the standard and basic rule of saving for the emergency fund. However, aside from knowing how much money should you have saved in an emergency fund, there are actually other ‘rules’ that you can use.
- The $2,467 Rule
In general, one of the biggest challenges in ‘3 to 6 months’ scheme is the psychological factor. People are often hindered by their own thoughts, when they question themselves. If the goal seems too high, why even bother trying? Based on a recent study, lower income families (in particular) may not need to set up saving fund that much. Based on the study done by University of Colorado and Universidad Diego Portales, lower income families are doing fine as long as they have saving, and it can be as much as $2,467. Of course, it would be better if you can target more. However, setting the purpose low can motivate you. If you are able to meet that $2,467 boundary, then feel free to continue saving.
- The Two-Step Fund
Some experts (such as Dave Ramsey) also suggest the two-step method. He advises that you should have a starter emergency fund. It should be around $1,000 especially if you have debt. After you have paid it off entirely, redirect the payments to a completely full fund with ‘3 to 6 months’ rule.
Keep in mind that an emergency fund of $1,000 isn’t exactly much. It is especially risky if you have unstable job, you have a family, or you live in high cost area. If you have to pay debts in years (instead of months), then it’s crucial to start having an emergency fund. Remember, it’s better to have a small one instead of having nothing.
Where to Save the Money?
The best place to save your emergency fund is in a bank account offering interest which you can easily access without penalties or taxes. A lot of people may think about saving in stocks or mutual funds, but they may likely lose value when you need to access the money fast.
Not only you need to place the funds in an account that is easily accessed without you being charged of early penalties, but it would be best if you can easily manage it. To ensure safe saving, you can manage automatic deposit. It means that the bank can connect your bank account to your saving account, and it can automatically transfer the money after you get the monthly payment. Your saving progress can be monitored and planned out, and it will ensure successful outcome.
Why the Fund Works
The emergency fund has its own function and use; which is to protect you from misfortunate events or the worst financial mishaps, like losing a job. For the majority of people, the ‘3 to 6 months’ rule gives them enough time and also resources to help them find another job, even if it’s a part-time project or a temporary work, while still looking for work.
The funds can also protect you against smaller circumstances, like surprising medical bills, broken car, home repair, or a sick pet or kid. Discipline is crucial for success. Think about need over want. Don’t rationalize costly gift or flash sale as an emergency – simply because you WANT it. You don’t want to regret it when real emergency happens, and it involves your family. When you don’t have enough funds to cover real issues, you may have to take a loan. Would you be able to handle it? Don’t you think it would be better to get interest from your savings account than to pay interest to the lender? All of these start from the question how much money to save for emergency fund and really start off with your saving plan.