Using money wisely and building wealth

How big should my emergency fund be?

Everyone should have an emergency fund. An emergency funds’ purpose is to cover your expenses in case you lose your current income. This is usually calculated by finding out what your monthly expenses are and multiplying this by how many months you may need it. This brings us to the ultimate question…how many months should I have? There are several rules regarding how large your emergency fund should be. The number of months’ worth of expenses range from 3-12 months. What is the right number for you?

A few things to keep in mind when determining how much you should have in your emergency fund…

Job-Security: How secure is your job and how long would it take you to replace your income if you lost your current job? Under normal economic conditions, it takes an average of 3 months to find a new job. If you are in a high-demand profession then you can tend to lower how much emergency fund you maintain since finding a new job would be much easier. Our family works in an unstable industry (construction) making our security a little lower than most.

Earners vs. Dependents: How many people are counting on your income? Are there other potential income earners in the household? How would the lifestyle of not only yourself but others affected by your current income?

Current Debt: You don’t want to be sitting on a pile of money in a savings account earning 0.0000001% (I’m not exaggerating those zeros!) interest when you have a lot of debt. Examine how much interest you are paying on your debt. Is it really worth having a full 8 months emergency fund when you are paying 24% interest on a credit card you could knock out on a snowball plan?

Foreseen Emergencies: I’m not talking about the “emergencies” like new tires on the car, or a last minute vacation, I’m talking about such foreseen emergencies such as a known medical condition in the family that could take a turn for the worst at any minute or driving an automobile on its last leg that you know you will need to replace before the end of the year.

Personal Comfort Level: You can look at the figures all day long, consult professionals and have the “magic” number sitting in a savings account earmarked EMERGENCY but still feel uncomfortable. Some people just need a little more security in order to sleep well at night. Others fly by the seat of their pants and think they can always eat tree bark if they lose their job. You need to find that happy place and for each one of us, it’s different.

Having something is better than nothing. If you’ve thought these questions through and have come up with what seems like an unattainable figure, relax. Start putting a little away each month and you will be well on your way to diverting the next emergency.

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