How Much Do You Need in an Emergency Fund?
Sometimes, everything will be going great – You’ll have an amazing job and a surplus of money every month. Then, suddenly, the unexpected happens (as it is prone to do) and you need some extra cash to get through it. Making an emergency fund will make the ‘hard times’ much easier to deal with. But where will it come from? How much do you need? This is all entirely dependent upon your current living situation.
Evaluate your Expenses: Figure out how much it costs you to live every month. How much is rent and utilities each month? How much money are you consuming in food? What sort of commuting costs are you looking at? What about the less-frequent expenses (such as doctor appointments)? Although figuring out all of this may be tedious and frustrating, it will only benefit you in the long run. Should you lose your source of income, you will know exactly how much money you need in order to survive without it and how many months you can afford to do it for.
Set Priorities: By limiting your spending, you’ll increase the amount of money saved for emergencies as well as the amount you bring in per month. Adjust your current budget to make your job of building an emergency fund easier. Cut back on frivolous spending – consider setting limits to the amount of money you spend each month on things you don’t need.
Find a Target Amount: If you were to lose your job right now, how long would you survive? You want to make sure that you will be secure for about 3-6 months. Therefore, take the amount of money you spend in a month and multiply that by as many months as you think you’ll need to get back on your feet. It would be ideal to have as many as six months to recover, but for the less resourceful, three will usually be just fine.
Plan Ahead: Come up with a plan to build the amount of money in your emergency fund. Always put a certain amount of money away each month. Open a separate savings account to help reduce the temptation to overspend. Save it for a ‘rainy day’. When that rainy day comes along, you’ll be prepared. Even if you surpass the amount of money you aim to keep in your emergency fund, it is always a good idea to continue to build it up if you can afford to. You can never be too safe!
Start Small: If you can’t afford to save up a lot of money right away, add a little at a time. Depositing ten dollars a week for the first few months can add up to a surprisingly large amount. As you can afford to, add more each week. If it helps, establish a routine – add 10-20% of every paycheck you cash, for instance. Or, sign up with one of those banks that offer to help you save money for you by taking a percentage of every charge you make and depositing it into a savings account.
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