It is prudent planning to have at least three to six months of liquid/cash assets set aside in the event of a loss of job, medical emergency, short-term disability, etc. Use this calculator to help determine how much you need to set aside monthly or as a lump sum to create an emergency fund.
Saving for an emergency fund is crucial for your financial health. If you ever can’t work, are injured or have a financial emergency like a costly but needed car repair, having an emergency fund can help you pay for these situations more easily. Many people believe the bigger the emergency fund, the better. After all, in the event of an emergency, the last thing you want to worry about is money. In the case of emergency cash, though, more isn’t always best.
Having too much in your emergency fund can mean you have less available for important long-term savings, such as your retirement fund. In addition, you’ll probably keep your emergency fund in a savings account, where your money is easily accessible should you need it. Unfortunately, savings accounts only give you low interest rates, which often isn’t enough to offset inflation. In addition, if you put too much in your emergency fund, you won’t be able to put more toward other investments, where your money can grow faster.
How Much Do I Need?
So, what is the right mix for your emergency funds? The basic rule of thumb is three to six months of expenses should be in your emergency fund. This means expenses, not income. If you were to cut out non-essentials, how much money would you need to pay for groceries, utilities, transportation, rent or mortgage and other basics for a month? This number, multiplied by three or six gives you a basic range.
Even that only tells part of the story, though. If your job is unstable and tied to the economy, or if you’re in an industry where layoffs are common, it may make sense to save up closer to six months or more of expenses. If you have dependents or a chronic health condition, you may want more than six months of expenses stashed away for your own peace of mind, as well.
In a true emergency, you’ll also want more than just a basic savings fund. You should have a written financial disaster plan that outlines exactly how you can earn more and save extra in the event of a problem. Maybe there is a temp agency you can contact right away or subscriptions you can cancel to save money. Knowing how you can swing into action right away can help your emergency fund go further. You might also want to look at how you might be able to tap into investments or other potential sources of income if you really need to.
To really find out the right balance for your financial cushion, use the free emergency fund calculator from Money Help Center. This no-bias calculator helps you find the correct mix to protect you while still freeing money up for other savings and investments.