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Emergency Savings Fund; How Big Should It Be?

The size of your emergency fund depends on your personal situation.
Just as there's a lot of conflicting advice on many money issues, there are different recommendations on how much to save in your emergency fund depending on who you get the advice from. Though the commonly accepted advice states you should save three to six months' worth of living expenses, some financial advisors feel that to be totally safe you should save a year's worth of expenses, and some say you can get by with as little as $1000 in an emergency fund.

The amount you'll need to save depends on your unique situation, and what you're comfortable taking a chance on. An adequate savings can help you through an emergency without dramatically altering your current lifestyle, and prevent you from having to run up debt. And after a careful look at your financial situation, only you can decide how much you really need to be safe.

Factors to consider when determining how much you need in an emergency fund:
  • How many people depend on your income? A single person with no dependants may be willing to gamble with minimal savings, but it would be dangerous for someone with a family to take that chance. Losing a job can cause a major set-back when you have more people to feed, and there's also a higher chance of an emergency room visit or serious illness when you have more people in your family, as opposed to a lone individual.
  • Do you have someone else who contributes to the household's expenses? If you're the sole breadwinner in the family, then a significant savings is a must. But you may be alright with less savings if you have a spouse or partner that also earns a good income.
  • How secure is your job? Is your job seasonal or based on commissions? And how is the general job market in your field? Would you be able to easily find a new position if you were to lose your current employment? Losing a job can cause serious hardship if your occupation isn't in high demand, or it may not be a big deal if you can go out and find a new one within a few weeks.
  • How's your state of health? Health conditions that may prevent you from working should be considered when you figure how much emergency savings you'll need. You may feel comfortable with less savings if you are generally healthy, but keep in mind that anyone, no matter how healthy, can come down with a serious illness after travelling or become injured while playing their favorite sport.
  • Do you own or rent? Renters don't have to worry about expenses relating to the furnace breaking, the roof leaking, or the vinyl siding blowing away. Homeowners should always be prepared for unexpected appliance breakdowns and regular home maintenance, as well as possibly more expensive house-related expenses.
  • What condition is your property in? Surprise expenses will be less likely if you drive a brand-new car or have a newly built house, as opposed to driving a twenty year old car with 150,000 miles on it or owning a 90 year-old farmhouse.
  • How much debt do you have? If you have lots of high-interest credit card debt, you'll be better off if those accounts are paid down before you put money in a low-interest savings account. But if an emergency comes up, you'll be forced to use your credit card again, making it difficult to break the cycle. Consider reserving your lowest APR card for strict emergencies until you pay off your high APR credit cards.
  • Do you have good medical and health care coverage? High health insurancedeductibles can save on the premium, and many of us are willing to take that chance to reduce our monthly expense. The problem comes up if major medical care is needed, and then those expenses can be a serious burden. Consider putting away enough to cover at least the deductible, in case you or your family members were to be hospitalized. And if you're going without health insurance, consider getting a low-cost policy to cover your major medical expenses.
  • Do you have assets that can be sold if necessary? Do you have an extra car or an RV you rarely use, or other valuables that can be liquidated if it came down to that? While I'm not advocating running to the pawn shop every time you need some cash, you may be okay with less money in an emergency savings account if you have possessions of value that you wouldn't mind parting with anyway.
  • Do you have other types of investments? It's heartily recommended by financial experts to keep emergency stash in a safe and liquid account. Emergency savings shouldn't be kept in fluctuating investments like stocks and mutual funds, since you won't be sure of what the market conditions will be like when you need the money. But you may feel comfortable with less of an emergency savings if you have other money invested in stocks, bonds, or mutual funds, just keep in mind that you may have to sell at a loss.
  • How well do you deal with uncertainty? There are a lot of uncertainties in our lives, and some people need more security than others to feel comfortable and safe. Some feel confident that they can conquer any hurdle, no matter how trying it may be, and may actually welcome the challenge. And some really only feel truly secure when they have the cash in the bank. Your own personality will guide you to how little you can manage on or how much you need to survive. It truly is an individual choice as to how much to put into your savings, as long as you consider the needs of those who depend on you.

And a final note - It is possible to have too much in your emergency fund.
Save enough to feel secure, but know when to call it quits on adding to your emergency fund. Emergency fund cash should be easily accessible in a highly liquid account, so you can get to it quickly when you need it. The price you pay for this liquidity is in the form of lost earnings; don't save too much in a low-interest account. Once you have adequate savings so that you are protected against unforeseen expenses, begin looking into bigger and better investment vehicles for any of your additional savings.


Sources:
getrichslowly.org
stretcher.com
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Friday, 29 March 2024

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