Figuring the Size of Your Emergency Fund

Creating an emergency fund can keep you from having to dip into your retirement savings, or into money that you have budgeted for other essentials. It is one of the keys to healthy finances. When planning your emergency fund, the big question relates to size: how much do you need to save? A rule of thumb offered by many experts is to have three to six months of basic living expenses stored away in a savings account that you keep separate from your regular checking account. Given the fact that the recent economic crises showed us all that it is possible for people to be without work for considerably longer than six months, you may want to have an emergency fund that can last you anywhere from nine months to more than a year if it becomes necessary.

Figuring the Size of Your Emergency Fund

To calculate your basic living expenses you will need to:

  • Determine how much you spend per month on essentials. This means things like fuel for your car, utilities, food, medications and others.
  • Be willing to forego nonessentials like eating out and cable TV.
  • Take into account that you may face new expenses in an emergency like medical copayments; this means that you will need to add a layer of cushioning to your monthly spending estimate.

Other factors to consider when determining how much you want to save for emergencies include:

  • How many members of your household have jobs? Do you have rental properties or other investments that are reliable sources of income? If you have multiple streams of income, you may be able to save less and last longer if one breadwinner loses their job.
  • Do you have in-demand credentials? This affects how quickly you will be able to find a new job. If you are confident that you will be able to find work quickly after being laid off then you may be able to weather the storm with a smaller emergency fund.
  • Do you have children? These add considerably to your monthly expenses and mean that you will have to save more.

The bare minimum amount of money you should keep on hand is $1,000. While this is not enough money to survive on for any length of time, it is enough to cover smaller expenses in the short term, like car repairs or utility bills.

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