How Big Should Your Emergency Fund Be?

How Big Should Your Emergency Fund Be?
August 10 19:47 2018 Print This Article

Wouldn’t it feel great to have a buffer between you and the unexpected financial needs that life may throw at you? An emergency fund is like a cushion that helps you stay relaxed and sleep soundly at night knowing that it will turn a major financial crisis into just a slight inconvenience. No matter how good you are in financial planning, you can’t predict what the future holds.

Unexpected expenses, large and small, will always crop up from time to time. Establishing and maintaining an emergency fund can have a big payoff in the future. However, the big question has always been; “how big should an emergency fund?” Financial experts have varying views on how big an emergency fund should be but the bottom line is that whatever you set aside as your emergency fund should be able to get you out of an unexpected financial crisis that may come up at any time.

Establish Your Monthly Expenses

The first step towards building an emergency fund is sitting down and figuring out how much money you spend in a month. You should only focus on those expenses that are necessary to know how much you will need in your emergency fund. Ignore the non-essential things in your budget such as gym membership and vacation fund. Come up with a list of your monthly bills and once you have calculated your average monthly expenses, determine how many months you need to cover to get a clue of how much you should save in your emergency fund.

How Big Should Your Emergency Fund Be?

The amount of money you should set aside as your emergency fund will depend on various factors such as your food and housing expenses, insurance, debt repayment, your ability to get an emergency loan, and other personal expenses. The size of your emergency fund will also depend on the stability of your income. For instance, if your income is more stable and you don’t depend on a single source of income, you may need a smaller emergency fund compared to someone with an unstable income.

If your income is stable, you need to set aside between three to six months’ worth of your expenses as your emergency fund. However, if you are a single-income household, self-employed, or a freelancer, you need to set aside at least six months’ worth of your basic expenses as your emergency fund. This means that if you lose your job, you can pay your bills for at least six months as you look for another source of income.

Saving Something Is Better than Nothing

Do you feel like you can’t save enough money in your emergency fund? Don’t panic since you can start small and grow it to the right size with time. Start by stashing away smaller amounts of money on a regular basis and watch your emergency fund grow. With time, you will eventually meet your target.

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