Unexpected expenses are inevitable. No matter how strictly you adhere to a budget, forces beyond your control will eventually stick you with an expense you haven’t accounted for.
Whether you’re faced with paying for a new water heater, a new transmission for your car, an unexpected trip to the doctor, or even a speeding ticket, you don’t want circumstances like these to undermine the financial progress you’ve made.
An emergency fund is designed for exactly this purpose: to give you last-minute spending power to absorb surprise costs without going into debt. Your emergency fund is also an important resource if you lose a source of income for a period of time. With a safety net of money tucked away, you can literally buy yourself time.
So here’s the big question: How much money should you put into your emergency fund?
The Simple Answer
If you ask most financial experts, the answer is clear: In a perfect world, your emergency fund will contain about 4-6 months’ worth of your living expenses.
Why so much? If you don’t have an emergency fund in place, losing your job or dealing with an unexpected incident might force you to resort to using credit cards, selling an asset such as your car, or downsizing your home.
Your emergency fund won’t last forever, but it will provide peace of mind, help steady your finances, and give you time to come up with another solution. Maybe you get another job within a couple of months, at which point you’ll be able to replenish the funds you spent in the meantime.
Other Factors to Consider
Though 4-6 months of expenses is a typical goal, other factors may increase the amount of money you should save in an emergency fund.
For example, if you’re self-employed or work in an industry where layoffs and employment instability are common, you might want to save even more than the recommended amount.
Similarly, if you work in a field that is heavily affected by economic recessions—such as tourism or restaurants—you might consider increasing how much you save, because economic shifts could reduce your take-home pay or lead to periods of unemployment.
Also, if you’re anticipating new living expenses in the future, such as welcoming a child into the family or purchasing a new car, it’s helpful to bulk up that fund even more, giving you greater assurance that you can absorb these costs without having to change your long-term plans.
Remember, Every Little Bit Helps
If the thought of saving half a year of living expenses makes you dizzy, you’re not alone. This is great financial advice, but the reality is that many people—especially young professionals at the start of their careers—don’t have the financial means to stash a large amount of money into a savings account right away.
In this case, 4-6 months may be more of a long-term goal. Focus on achievable savings goals when building up your savings. Even by saving $25 from every bi-weekly paycheck, you can save $650 over the course of a year. It’s not quite the recommended goal, but having that amount saved will be a huge help down the road.
If you’re able, bump up that number to $100 from every paycheck. If you can do this, after a year, you’ll have $2,600 collecting interest in a bank account, and you can continue building up that amount in the months ahead.
As you build up your emergency fund, remember to put savings into an account that’s out of sight and out of mind. Consider a high-yield savings account that will generate a little profit off of your emergency fund—think of it as a reward for giving yourself financial security. Questions about starting an emergency fund? We can help! Get in touch with our team here.