How Much Should You Save into Your Emergency Fund?
- May 7, 2018
$1,000 Seed Money.
Everyone should have an emergency fund, everyone agrees. However, there is considerable disagreement over how big an emergency fund should be. The specific size should always be based on a combination of individual needs and preferences, but if you are looking for a guide, below are some recommendations.
A $ 1,000 emergency fund
The idea of a $ 1,000 emergency fund has become quite popular, not least because of its strong support from television personalities. While I think that’s a good start for someone who has no savings at all, it is also a reality that $ 1,000 does not cover too much.
It will cover a relatively modest car repair, and modest means today somewhere in the range of $ 500 to $ 1,000. However, it will not cover the more substantial repairs, like replacing a gearbox or your car. It will not even cover the common monthly housing benefit or the deductible of health insurance. If one of these emergencies are thrown at you, and your $ 1,000 emergency fund will certainly help, you will be rushed to find the rest of the money you need elsewhere.
I am thinking more of a $ 1,000 emergency fund than seed money – you have built it up so far, but then add it quickly. Emergencies can eventually hit faster than you can save money on them.
30 days living expenses
For most people, this should be the minimum goal. For one thing, emergency funds amounting to 30 days of living will give you a place in a job loss until the unemployment checks begin. Moreover, aside from unemployment benefits, you also have some time to initiate a job search strategy. A period of emotional adjustment often follows job loss, and it will help you to know that you will at least have needs while you reshape yourself.
Another reason that 30 days is a better target is that it is likely to represent several thousand dollars, and that will do a much better job of covering major car repairs, medical deductibles, and other large and unexpected bills.
3-6 months living expenses
In this area, we are talking about a truly credible emergency fund. The cost of living over several months not only gives you more time to lose a job but can also cover multiple emergencies. For example, it is not at all unthinkable that a major car repair will take place around the same time as a job loss. With 3-6 months taken away, you could deal with both.
The prevailing idea is that spending for three months works best for those with stable sources of income such as salaries or pensions, while six months is the better target for people with variable incomes. Self-employed, commission employees or contract workers fall into this category.
Another way to determine the size of your emergency fund might be based on known contingencies. For example, suppose your health insurance deductible is $ 2,000, the cap on the cost of a major car repair is $ 2,000, and you have a $ 500 deductible for your auto insurance. By adding the three together, you decide that $ 4,500 will be a sufficient emergency fund.
You can also add 30 days living expenses, and if you do that, you will come, whatever. One of the real benefits of setting up your emergency fund is that you will be able to handle multiple emergencies without being exploited after the emergency has ended. This is a real emergency fund.
No matter what fund size you start with, it keeps growing!
Regardless of the original size of your emergency fund, plan to add it. There are at least five reasons why your fund should grow over time:
- The cost of living increases over time
- Spending tends to increase with higher incomes, and this should be reflected in your fund
- There are more emergencies than commonly thought, especially if you have children
- If emergencies occur, your emergency fund must be replenished
- In general, it is better to have an emergency fund that’s a little too big than one that’s a little too small
30 Money Saving Expert Tips
Ways to Get Frugal
- Buy used books online
- Borrow DVDs and books from libraries
- Shop secondhand
- Buy generic brands
- Make your laundry detergent
- Save your spare change!
- Prepare double dinner portions for tomorrows lunch
- Ask for discounts – student, children, military, senior, church affiliation
- Ride a bike or walk
Controlling Monthly Entertainment
- Cut cable or trim satellite package
- Use Redbox instead of the movie store
- Use Netflix instead of cable
- Set specific days of the month for eating out
- Go to the matinee instead of the evening movie
- Make your coffee or set aside cash only for your mochas
Lowering Other Monthly Bills
- Contact insurance providers – increase deductibles, lowering payments
- Call credit card company to lower interest rates on outstanding balances
- Use Sunday papers to reduce grocery bill with coupons
- Cut unused subscriptions and memberships
- Lower your utility bill with an automatically adjusting thermostat
- Trim down your cell phone plan
Building Retirement Savings
- Take advantage of the match!
- Make an Ira contribution to you and your spouse
- Convert to Roth for future tax savings
- Max out retirement accounts and utilize catch up provisions
Growing Your Wealth
- Create automatic savings – pay yourself first!
- Build your emergency fund!
- Have a garage sale – bank the cash!
- Sell Your Stuff on eBay or Amazon!
- Set aside money for a car fund – pay for your next car with cash!
Michele Y. Thompson is an author, contributing writer on MyStock911 and MortgageExpertGuide , commercial mortgage broker, entrepreneur, and finance coach. The culmination of her work in mortgage banker finance, global investor services, real estate, and debt consulting; along with her advanced degrees has driven her to help new and existing businesses reach their goals for over 20 years.