My General Blog

.

How Big Should Your Emergency Fund Be?


Maintaining an emergency fund is one of the critical pillars of a healthy financial life. If you are trying to get yourfinancial life in order, all financial experts will tell you the same thing: Build an emergency fund that will see you through the most challenging times of your life. An emergency fund is simply the money that you put aside forunexpected events in your life such as an unexpected hospital bill or a car repair.

However, the big question that will come up when it comes to building an emergency fund is; how big should your emergency fund be? The golden rule of emergency funds has always been to set aside three to six months’ worth of your expenses as your emergency fund. However, is this sufficient for everyone? Are there some cases when your emergency fund should be below or beyond the three to six months expenses? Read on to find out.

Image result for emergency fund
Calculate How Much Money You Need

You need to understand the fact that the principle of the three to six months usually refers to your expenses and not your income. Where you fall on that scale will also depend on a wide range of other factors. Is your source of income closely tied to the economy? Are you a single-income household? Do you have a single source of income or are there more than two earners in your house? You must consider all these factors while deciding how much you need to set aside as your emergency fund.

The next thing you need to do is to evaluate your needs critically. Make sure that you have a comprehensive budget in place before you start this process. Determine all your basic expenses such as healthcare costs, food, water, rent, debt payments, and insurance and add how much these expenses cost you every month. Multiply the figure with the exact number of months that you wish to cover to know how large your emergency fund should be.

It’s Good to Have a Bigger Emergency Fund

Keep in mind that it is okay to build a bigger emergency fund other than save what will cater for your needs for alimited period. Look at it from this perspective; if your emergency fund can only sustain you for four months andyou lose your job and you can’t find another one for ten months, what happens? You can no longer access your cash advance, and you have already exhausted your savings.

This is just one scenario, but you need to keep in mind that there are so many potential scenarios that could drain youremergency fund any time. Therefore, it is good to set aside at least eight to twelve months’ worth of your expenses as your emergency fund. By doing so, you can always be sure that you are going to be safe no matter what might happen.

Self Employed/ Freelancers

If you are self-employed or a full-time freelancer, the chances are that your income is highly unpredictable. You couldhave lots of jobs in one month and stay almost jobless the following month and let us not even forget the fact that some of your clients could be pokey when it comes to cutting checks for you. In such a case, you may need an emergency fund that can last you for at least nine months which will offer you a bit of peace of mind when things go wrong. In a nutshell, the more unpredictable your income is, the more you need a bigger emergency fund.




Leave a Reply

Your email address will not be published. Required fields are marked *