Understanding and determining how much money you should keep for emergencies.
Emergencies happen to everyone, whether you have a steady income or are managing your finances. Unexpected expenses can throw your life into turmoil, and if you don’t have the money to resolve the crisis, things can get even more difficult.
What is an Emergency Fund?
Financial experts at Vanguard explain, “An emergency fund is a stash of money set aside to cover the financial surprises life throws your way.” If something unexpected happens that severely impacts your income or expenses, your emergency fund can help you get through it.
Emergencies can range from job loss to medical expenses to car or home repairs. If you lose your job, your emergency fund can help you get by while you search for a new opportunity. If your car breaks down, you’ll have the funds for repairs or a replacement. And if a major appliance fails and isn’t covered by a warranty, you can afford to replace it.
Why Have an Emergency Fund?
Having money set aside for emergencies gives you peace of mind, knowing you can handle unexpected setbacks. Dana Anspach of The Balance explains that an emergency fund protects your long-term investments. It can help you avoid dipping into retirement funds, selling stocks, or taking out loans during an emergency.
How Much Should I Keep in My Emergency Fund?
The amount you should keep in your emergency fund depends on your family’s living expenses. To calculate this, track your recurring expenses and determine how much you spend on them.
Anspach suggests that “At a minimum, you should have three months of living expenses in your emergency fund.” However, if you have dependents who don’t have their own income, such as children or a stay-at-home spouse, you should aim for six months of living expenses. Depending on your situation, this amount could range from $3,000 to $30,000.
Track all your expenses for a month, identify essential costs, and add them up. Common expenses include mortgage or rent payments, utilities, car payments, gas, insurance, cell phone bills, groceries, prescriptions, vet visits, and memberships you wouldn’t want to cancel in an emergency. Also consider your age, career field, and any government assistance that may be available when deciding how much to save.
Where Do I Get the Money for My Emergency Fund?
Building your emergency fund isn’t something you can do with just one paycheck. It takes time, but you can start by setting aside 5-10% of each paycheck. You should try to save this amount until you reach at least three months' worth of living expenses.
Even if you feel like you can’t spare money each month, try to find ways to trim expenses so you can put aside something for your emergency fund.
Where Should I Keep My Emergency Fund?
Your emergency fund needs to be accessible when you need it most, so keep it in an account that’s easy to access. Consider a checking or money market account with debit or check-writing privileges. Just be sure to keep it separate from your everyday accounts to avoid the temptation of using it for non-emergencies.
No matter your income or financial situation, everyone needs an emergency fund to help navigate life’s surprises.
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