This is one of those questions that will elicit a wide range of answers. One expert will suggest that three months’ worth of expenses tucked away in an emergency fund will suffice. Another expert will scoff and say you need at least a year’s worth. So, really, how much should you have in your emergency fund?
Well, it’s personal. I wish I could give you straightforward answer like “$10,000”. But, truth is, it really depends. I can, however, give you a few questions to ask yourself to get you started.
What are your monthly expenses?
Track your expenses for three months. Include costs related to housing, utilities, food, health insurance, and any other necessary expenses. You don’t have to include things you expect to cut from your budget in the event of an emergency situation, such as vacations and shopping splurges. Don’t ignore debt payments, though. Include that in your monthly expenses. You don’t want to be set back in your debt payoff.
Use this monthly expense number as your starting point.
How long would it take to find a new job (or rebound from the emergency)?
If you are tapping into your emergency fund due to a job loss, how long would it take to secure a new job and replace the previous income? If you work in a field that is constantly hiring, it may only take a couple of weeks to land a new job. On the flip side, if the job market is saturated, you may be hunting for a few months.
Use the number of months it would take you to find a new job as your multiplier.
What is your job situation?
Are layoffs common in your company or line of work? Do you receive a regular paycheck or does your income fluctuate from week to week, or month to month?
The less stable your job situation, the more you should have in your emergency fund.
Plug in your numbers.
Now that you’ve answered these questions, here comes the easy part.
Monthly expenses x Number of months to secure new job = Emergency fund
Feel free to add a little extra to your e-fund number if your job is prone to layoffs or not stable.
Are you a one-income family?
If your family relies on a single income and you do not have a life insurance policy on the primary earner, be sure to read this post and this post. Also, consider disability insurance on the breadwinner.
Bottom line is, save something. Anything! Start putting aside $100 a month and work your way up to your emergency fund goal.