If you’ve ever wondered how much money you should keep stashed away for a rainy day, then keep reading. I’m about to teach you how much you need to have in your emergency fund.
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We all know Murphy’s Law: anything that can go wrong will go wrong. You could lose your job. Your car could break down. Your hot water heater could die. When it comes to keeping yourself out of debt when things like this happen, there’s no better way than having an emergency fund – that pile of cash you have stashed away for a rainy day.
If you don’t have an emergency fund, then something as simple as a flat tire or an unexpected visit to the doctor could result in you needing to go into debt. So what’s the ideal amount you should keep in an emergency fund? And how do you know when you have enough to cover any emergency that might come up?
Your Emergency Fund is Based on You
The first thing to understand is that the amount of money in your emergency fund is based on you – your life, your income, and most importantly how much you typically spend each month. Step number one in determining how much you need in your emergency fund is understanding your monthly expenses through the use of a monthly budget. If you’re not familiar with how to create a zero-based monthly budget, click right here for my guide.
Most recommendations for an emergency fund are based on your monthly expenses. Once you understand how much it costs you each month to run your household, it becomes a lot easier to do the calculation for your emergency fund. When determining your monthly expenses for the purpose of an emergency fund, I personally like to include only the essential expenses like housing, utilities, food, and insurance. I do have other expenses in my monthly budget like clothes, streaming services, and supplies for homebrewing. But because these expenses are not essential, I don’t like to consider them when planning for my emergency fund. Feel free to include expenses like this or to exclude them like I do.
As a quick example, let’s say my monthly housing expense is one thousand dollars, my monthly utilities average one hundred dollars, my monthly grocery spending is four hundred dollars, and my monthly auto and life insurance policies total two hundred dollars. In this scenario, the total of my essential monthly expenses is one thousand seven hundred dollars. I’m not including the things that I could live without.
Now I just need to determine how many months of expenses to have stashed away. Conventional wisdom says you should have anywhere from three to six months worth of expenses saved up for an emergency. The exact number of months worth of expenses you should have set aside will be based on your unique situation and the potential risks you face. If your income is very stable, you have a really reliable vehicle, and you don’t need to worry about any big home repairs because you’re renting, you’re probably alright sticking with a three month emergency fund. If you’re working on commission only, your car has a history of expensive repairs, and the roof on your home is nearing the end of its life span, well, you’re better off with six months.
Take the time to evaluate your situation and decide how many months is right for you. Then simply multiply that number times the expenses amount from earlier to get your answer!
One last thing that I think is important to mention: Your emergency fund does not need to be static! Our lives are constantly changing, so don’t be afraid to re-evaluate your emergency fund every so often! If you notice that your air conditioning system or your refrigerator might need to be replaced soon, beef up your emergency fund a little bit so you’ll be ready when the time comes. If you used to be self-employed but now you’re in a stable, full-time position for an established company, feel free to tone down your emergency fund and use some of that extra cash to achieve one of your other goals. In that situation, as long as you still have a minimum of three months of expenses saved, you’ll be just fine.
How many months of expenses is right for your emergency fund? Let me know in the comments. Happy saving!