Emergency Funds are an essential part of living a stress free life. Some individuals can live paycheck to paycheck and find inner balance, but most would prefer to avoid this lifestyle. So how large should your emergency fund be? Many experts say 6-months of expenses, but that is far too broad of a rule. So how do you find the right amount for you?
Evaluate your “needed liabilities”. What is the bare minimum amount of cash on which you could survive? What costs are unavoidable (things like mortgage, car payments, etc.) – What do you view as “sunk costs.”
Could you reduce your housing expense?
Do you own a house?
Do you have equity in that home?
Could you move in with friends or family temporarily?
Could you sell your car and downgrade?
Could you remove your cell phone expense, cable bill, etc.?
How much could you reduce your food and gas budget?
It is important to know exactly what you and your family need month to month.
Assess your ability to get another job, and be conservative. Many people prior to 2008 were getting job offers left and right, but times have changed. What do you think your realistic timeframe for job placement would be? It’s always important to be conscious of the job market in your field. The harder it is to find a job in your field – the larger the emergency fund.
How secure is your current job? The more secure your current job is, the smaller the emergency fund.
Do you have any real estate or investments that could require more capital to continue to opreate? If for example you have rental properties – you are always susceptible to financial disasters that require capital to resolve. The more potential risk for you have – the larger your emergency funds should be. Do not count on bank financing for this capital – you may find it hard to secure credit when you are unemployed.
Now we come to the conclusion – You have a $ amount that you need per month and you have considered all of the factors above – what should you multiple that $ amount by?
Answer: Whatever makes you feel comfortable, within reason. Of course the larger the emergency fund the better, but if you feel comfortable with 2 months or 24 months – you should make sure you have enough emergency funds that you can resolve life’s problems. The general rule of 6 month’s of expenses is a good benchmark, but for many – it might be too small or too large.
You might be a father of 3 and feel that 6 months just isn’t enough to make sure you sleep well at night. If it isn’t – Keep saving and building that emergency fund until you feel safe about your family’s future.
If you are a 20-something year old and feel comfortable with only a couple of months of expenses then so be it, but be sure to understand the potential consequences if things do turn against you.
Assess your risks, evaluate your needs, and save until comfortable. It’s as simple as that.
Myself – I’m 25 years old and I have approximately 6-7 months, access to about 16 more months of home equity – so I’m finally starting to feel comfortable, but I personally wish I had more than 6-7 months in liquid reserves.