The peace that an emergency fund brings is awesome! But how much do you need? I wish I could give you a magic answer that would fit your situation (as well as everyone else’s). Unfortunately, I can’t. However, here are my guidelines for setting up an emergency fund for those times when you NEED cash.
The amount of one paycheck is what I teach people to save as their starting point. Why? Two reasons:
- It breaks the cycle of living paycheck to paycheck, keeping you from being dependent on that very next payday if something goes wrong.
- It customizes an amount to your situation. I’ve coached those in poverty and those who make well over $100,000 per year. If I gave you a fixed number, that wouldn’t work for everybody.
Remember, if you need cash, and need it right now, you don’t want to have to rely on debt to bail you out. This “short term” emergency fund is only purposed to cover you in the case f something going wrong while you’re working to get out of debt.
Most financial counselors agree you should aim to save 3-6 months of expenses. But which is it, 3 or 6? For this, you need to consider a few things.
- Remember we’re looking at saving 3-6 months of household EXPENSES, not household income. Some people overlook this piece and think they have to save 6 months of their salary. WHEW – that’s a big number. In that same vein, you need to consider how much “fluff” there is in your household expenses. If you lost your job tomorrow, would you keep the super-deluxe digital HD Cable with all the sports add-ons and unlimited on-demand movies? I know, I know, that’s a bit of a stretch, but what could you cut out and still meet all your household needs? In other words, if you boil it down to how much you REALLY need per month, how much is it?
- How tight is your existing budget and how much can you realistically save? If you can only scrape together $100/month to save toward emergencies, is it more realistic to expect you could save three months’ worth of expenses or six months’ worth?
- How hard do you believe it would be to find replacement income through another job…or anything else legal that would make you some money (be honest and REALLY consider this)? Take the number of months you believe it would take you and double it. That should almost give you an accurate number in today’s economy.
When you consider these three questions, along with your “gut” on how much you should save, that is the amount you should aim for. I know you wanted me just to tell you, but sorry…this one is your call.