HOW MUCH DO YOU NEED IN YOUR EMERGENCY FUND?

WHAT IS AN EMERGENCY FUND?

So, before we get into how much you might want to keep in an emergency fund, I want to make sure we are all clear on what an emergency fund is.  An emergency fund is a separate bank account with money specifically set aside to be able to cover major unexpected expenses. This fund should only be for things of a truly urgent nature that you do not have funds in your budget to cover. Some examples might be:

• Loss of job
• Major medical expenses
• Major home repairs
• Appliance repair or replacement
• Major car repairs
• Pet emergencies

THINGS TO CONSIDER

There are some things to think about when coming to a decision on how much you want to keep in an emergency fund.  There is no straightforward answer to this question.  I think above all, the most important part of your decision relates to what would make you feel comfortable.  You want to have an amount that makes you confident that you would be able to address most emergency situations that might come up.

If you have not yet started saving up an emergency fund, you will need to decide at what point you will begin working on this goal. Are you debt-free? If so then you probably should start working on your emergency fund now!

If you are working on getting out of debt, then you need to decide if you will pay off all of your debt first or work on both goals simultaneously.  Either way, even while paying off debt, you will want to have at least a small emergency fund to handle small emergencies to avoid using a credit card to cover them.

HOW MUCH DO YOU NEED TO SAVE?

Most experts say that you should have 3 to 6 months of expenses in your emergency fund.  So, if you haven’t already, you will need to take a good look at your expenses to determine what a month’s worth of expenses looks like.

When determining what your monthly expenses are, you should only consider things like:

• Food
• Housing costs
• Utilities
• Insurance premiums (home, auto, life, etc.)
• Cell phone (for communication)
• Transportation
• Minimum Debt Payments

Do not include things like:

• Cable TV
• Eating out
• Vacations / Travel
• Entertainment

These items would be cut out if you were living off of your emergency fund.

Don’t forget to include a proportion of irregular expenses.  For example, if you pay your homeowners or car insurance annually, you would need to take 1/12^th of that as part of your monthly expense amount.  You might also have things like an annual vet visit for your pets, car maintenance, quarterly property taxes.  You want to make sure not to forget about anything that is not paid on a monthly basis.

THIS SEEMS LIKE A LOT OF MONEY TO SAVE!

If this is the first time you are starting any significant savings, 3 to 6 months of expenses will likely feel a huge amount of money.  Don’t let that keep you from getting started.  Start small, maybe save up 2 weeks at a time.  Set small goals and keep building on them over time.  No matter what, the more you have saved the better off you will be.

SHOULD YOU LEAN MORE TOWARDS 3 MONTHS OR 6 MONTHS?

There are things you will want to consider when deciding if you want to lean more towards going on the having 3 months of an emergency fund, or airing more on the side of caution and having 6 months worth of expenses set aside. How stable is your source of income?  What is the likelihood that you could experience a job loss or period of unemployment? Do you or a family member have a medical issue that might require an occasional unexpected cost? Do you have an older vehicle that might need more maintenance? By considering these aspects of your life, it can help you decide what would make you feel most comfortable having in your emergency fund.

HOW TO BUILD UP YOUR EMERGENCY FUND

If your budget allows, consider setting up an automatic contribution to your emergency fund.  Most banks allow you to set up recurring transfers online.

Put any unexpected money that you might get in the account. This can be things such as a tax refund or a bonus, birthday gifts, Christmas gifts, and any other time you come across any additional money. If you find you came in under budget on an expense, stick the difference in your emergency fund! Most times if you make this a priority, you will find that you can find little ways to get more money into the account.

Keep in mind that anything you put into your emergency fund is more than what you had before!  So, just keep chipping away at the goal and do what you can to build the fund over time.

WHAT TYPE OF BANK ACCOUNT SHOULD YOUR EMERGENCY FUND BE HELD IN?

An emergency fund should be held in a regular checking or savings account that you can access relatively easily. One good account option to hold your emergency fund is in a high yield savings account. You can do some research online to look at the interest rates and minimum deposit requirements. Unfortunately for savings, interest rates are really low right now.  But, the purpose of this money is not for investing.  It is just money set aside to help you get through a really challenging time!

Thanks so much for checking in! If you would like to hear the podcast version of this topic to check out Lola’s Frugal Life Podcast! Also, be sure to check out my other blog posts on this site!