How big should your emergency fund be?

Piggy Bank-Hers

Most financial experts will agree that people should have an emergency fund. But there are different opinions on just how much money should be kept in that fund. The general consensus is to have anywhere between three months to a full year’s worth of expenses saved in case of emergency – that could easily be a difference of over $15,000.

Obviously, you can’t predict how much money you’ll need in an emergency. Your inclination may be to save as much as possible, but focusing too much on your emergency fund can negatively affect your other financial goals. You need time and money to save and invest for things like retirement, a home purchase, a wedding, or your children’s education. Sure, you could tap into your emergency fund for these things, but there are two problems with this: 

      1. If you use your emergency fund for non-emergencies once, you may find yourself doing it again and again. Personal finance isn’t as simple as making money and not spending it: it’s a mental and emotional exercise. You may not intend to continuously dip into your emergency fund (and maybe you’ll succeed) but you may find that doing it once makes it easier to ignore the fund’s purpose.
      2. There are likely better ways to save and invest for other financial goals. For example, it’s more efficient to save for retirement with an IRA or 401(k) than a savings account.

So, how much should you save in your emergency fund?

It’s important to remember that personal finance is personal. If a financial expert says to build an emergency fund that covers six months of all your expenses, consider it a guideline – not a hard and fast rule that you need to abide by. Six months-worth of expenses may be perfect for you. But it could be too little or maybe even too much. Your financial situation is unique and you need to discover what works best for you.

Here are a few questions to ask yourself when trying to determine the size of your emergency fund. There are many other variables to consider, some that will be unique to you, so take the time to build your own list of questions.

How steady/secure is your income?

If you don’t receive a steady paycheck, you may find yourself needing to dip into your emergency fund more often than someone on a salary. The same could be true if you receive a regular paycheck but don’t get (or are low on) sick or vacation pay; could you cover all your monthly expenses if you had a few days of unpaid leave?

What is the job market like in your area?

The average length of unemployment is nine months. Of course, your job search could be shorter or longer than that. Consider the job market in your area as well as your field of work. Are people in your area finding jobs quicker than the national average? Are your services in high demand? Consider additional factors like your age and work history, too.

All that said, keep in mind that your job search could take longer than you think it will, regardless of the opportunities in your area and your credentials.

Do you have regular medical expenses?

You don’t want to take any chances with your or someone else’s health. If you or someone in your household needs regular medical care or prescriptions, make sure your emergency fund can cover these expenses over a long period of time.

What is your health insurance situation?

Health insurance plans vary in cost and coverage. Make sure you understand what your plan covers and what you’ll have to pay for in addition to your premium. For example, if you have a high deductible, be prepared to pay some or all of it in an emergency. If you are covered through your employer, make sure you know what your health insurance options are if you were to lose your job.

Better safe than sorry

Not sure if you should have eight months of expenses saved or nine? Go for nine. Ultimately, it’s better to be over-prepared than underprepared, even if it means putting some of your other goals on hold a little while longer.

That said, don’t mindlessly stash money away for a rainy day. On the other hand, don’t save a certain amount of money just because someone told you to save that amount. Find a number that works specifically for you and your needs and create a savings plan to get there.

Do you have an emergency fund? What factors did you consider when deciding how much to stash away?

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