How Much Do I Put In My Emergency Fund?

Planning & Saving
on June 3, 2012

If you lost your job today, would you be able to survive financially? Would you be able to pay the mortgage, the car notes and the insurance premiums? Could you buy groceries and keep the lights turned on?

No? Then it’s time to start thinking about an emergency fund.

In a time of corporate downsizing and long unemployment lines, no one is truly safe. Planning for the unknown can take some of the stress out of daily life. Having an emergency fund is crucial.

What Is An Emergency Fund, Exactly?

I’m glad you asked. An emergency fund is money you have set aside for drastic circumstances. Perhaps you lost your job and need cash to see you through your period of unemployment. Maybe you are dealing with an illness that prevents you from working. Whatever the reason for needing the money, the important thing is that it be there.

There is a big difference between creating an emergency fund and having money socked away for an emergency. An emergency fund can sustain you and your family long term. Money for an emergency may simply be $500 in the back of a desk drawer for when the transmission finally goes out on your old Nova.

How Much Should I Have In My Emergency Fund?

Another good question. To determine the amount of your emergency fund, add up all of your monthly bills and expenses. Multiply this number by six and add 20% to the total.

Experts say everyone should have at least six months’ worth of living expenses saved for long term emergencies. Adding an extra 20% to that total allows for inflation, spending money or cash for future emergencies. Because, as they say, when it rains, it pours.

Okay, Wise Guy – Where Am I Supposed to Get That Kind of Money?

Saving money isn’t easy. As Americans, we have a propensity to spend everything we earn. In order to sock away a large amount of cash, lifestyle changes will have to be made.

Start your emergency fund with a hefty deposit. A tax refund can be a great catalyst for savings. In 2011, the average tax refund was just shy of $3000. Skip the Vegas vacation next year and deposit the refund directly into your savings account.

Small changes can have a big impact. By skipping the morning latte five days a week you can save an extra $1300 a year. Get rid of the cable TV in favor of cheaper streaming services like Netflix or Hulu and save another $1200 over the course of the year. Skipping one restaurant meal per week nets an incredible $1560 a year. These small changes alone can get you much closer to your goal.

Having an emergency fund with at least six months’ worth of living expenses can be a lifesaver if the unthinkable happens. Although saving a ton of money in a bad economy can seem impossible, small lifestyle changes can help you to reach your goal quicker than you thought possible.


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