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An emergency fund is essential for covering those unexpected expenses that pop up out of nowhere. The problem is 63% of Americans don’t have an emergency fund that could cover them in a $500 emergency. This is shocking news and indicates how ill-prepared the majority of the country is.
The consequences of this are many and varied, including being forced to take out loans. Those with poor credit records could find themselves in a situation where they are even forced to take out payday loans with high interest rates.
There is No Right Answer
To begin with, it’s important to make the point that there is no definitive answer to this. The only thing everyone can agree on is that an emergency fund of some form is necessary for everybody. There are actually many factors that could indicate how small or large your emergency fund needs to be.
In the following sections, this article will go through some of the main factors that will influence how big your emergency fund needs to be.
This is the big one. Job security is a huge issue because if you lose your job, you need enough money to tie you over until you can find a replacement income. In this economy, it could take anywhere from three to six months. Could you survive on your own without any money coming in during this time?
Everyone should have a few months of funding tucked away, but those with uncertainty over job security should have more. This includes jobs where you are at the bottom of the ladder, or in notoriously fluid middle manager jobs.
How Marketable Are Your Skills?
Staying on the theme of finding another job, another factor you have to take into account is how marketable your skills are. It’s unlikely that you would ever find yourself out of work for up to a year, but it can and does happen often.
Think about your skills and how marketable they are. You get bonus points for having skills that apply to multiple industries. Those that only apply to only one industry, however, are not very useful in other jobs. For example, that degree in golf course management isn’t much use outside of golf course management.
Once again, increase your emergency fund based on how marketable your skills are. In the worst case scenario, you will be left out of work for a considerable period of time, and need to have funds to support yourself.
How Many Potential Emergencies Can Come Up?
Consider your living and family situations. How many possible emergencies could pop up and affect you?
A single person living in rented accommodation has the least to worry about. They don’t have a family, and if something breaks, the landlord is the one who has to fix it. However, if you have a family, a pet, and you own your own home, everything is your responsibility.
Most emergencies will never cost more than a thousand dollars to fix, but you should still budget for them.
Feel free to reduce your emergency fund if you have other assets you can easily tap into. For example, certain investment funds may provide you with easy access to capital if you need it. You may already have savings accounts you can take money out of if something arises.
Look at how much you can withdraw without any penalties and adjust that emergency fund accordingly. Nevertheless, sometimes it is better to simply rely on an emergency fund rather than to disrupt lucrative investments.
Peace of Mind
This guide has so far looked at the practical elements to saving money for emergencies, but there is an argument to be made for peace of mind. You want to feel comfortable and as if you are ready for anything.
How much money do you need to put aside for you to feel comfortable?
This is the figure you really should be aiming for. If you feel good about the amount you have saved up, this is what really matters in the long-term. Anxieties will be extinguished and life will be more enjoyable.
How to Build an Emergency Fund?
Most people don’t have the capital on hand to simply erect a huge emergency fund that will make them ready for anything. It requires time and a conscious effort. This may include passing on certain luxuries so you can set money aside from your salary.
To get started, check out our guide on how to establish an emergency fund.
Author: Jeff Gitlen