Sometimes life happens and unexpected costs arise. Whether it’s an injury, illness, accident, lost job, or repair, emergencies can quickly ruin your financial security if you are not well prepared. If emergencies can’t be avoided, you can at least be prepared with an emergency fund. But how much should you have in your emergency fund?
How much should I save?
There is one major rule of thumb when it comes to how much you should have saved in your emergency fund; three to six months' worth of expenses. Since this is a wide range, you need to take several factors into account.
If you are:
- A low debt carrier
- Living in a low-cost of living area
- Using a reliable car
- Child and dependent free
- Job stable
- Able to rely on someone for financial assistance
You should save three or four months' worth of expenses.
If you are:
- Suffering from medical conditions
- Have a large amount of debt
- Living in a high-cost-of-living area
- A homeowner
- Using an unreliable or old car
- A provider or caregiver
- A gig worker with an unstable income
- Unable to rely on anyone for financial support
You should save six months' worth of expenses.
What expenses do I need to include?
To be able to calculate the amount of money you need to be saved in your emergency fund, you need to know the amount of your expenses each month. The expenses you need to start with are your essentials, such as:
- Housing (rent or mortgage)
- Health care
- Personal expenses
You do not need to include wants and luxuries, such as entertainment, travel, and shopping, in your emergency fund since you need to be focused on covering your essentials.
How do I build an emergency fund?
First, set your savings goal based on the factors we mentioned above. The difference between three months of expenses and six months of expenses is substantial.
Next, calculate one month’s worth of essential expenses, based on the list of expenses above. Be sure to leave out any unnecessary expenditures.
Calculate the total amount of your savings goal, and break it down into achievable goals. Having one large number that you’re aiming to reach can feel unattainable. By breaking it down into smaller increments, you will feel more accomplished as you are on the path to reaching your goal.
Take a look at your current monthly budget and see what you can set aside each month for your emergency fund. Once you have decided on the amount, set up automatic transfers to stay on track.
If you ever have money fall in your lap, such as a tax refund, deposit the funds into your emergency savings to help you reach your goal faster.
A proper emergency fund can make or break your financial stability in the event of an emergency or unexpected bill. If you are having trouble building an emergency fund or finding room in your budget to fund your emergency savings, our advisors at Lifebridge Financial Group are here to assist. Schedule a consultation with us today to get started.