Emergency Fund: How Much Do You Really Need?
Keeping an emergency fund available for unforeseen crises is a financial planning tip that is widely quoted. Any number of situations could come up where you may need to dip into this short term savings fund, such as loss of job (a more likely occurrence with the current economic situation), emergency medical expenses, or home repairs.
But how big does this emergency fund really need to be? Some financial planners suggest three months salary is a good general rule. If you would ask Suze Orman, (yes I do watch her show especially the “Can You Afford It” segment) she will say 6-8 months or even one year if you can afford is more advantageous. However, the right answer for you will depend on your circumstances and the risks that you are trying to cover. Some of the risks that people put aside savings for can be covered less expensively with insurance.
Take home repair for example. If your air conditioner or furnace were to quit for good, the expense of buying a new one might damage your current cash flow.
Medical expenses present a similar situation. If a $5,000 trip to the emergency room would put you in serious financial jeopardy, adjusting your health insurance plan to lower your deductible would make more sense than socking the $5,000 away in an emergency fund.
Insuring against a job loss is something that an emergency fund makes sense for. How much you need depends on your monthly expenses and how long you predict you will be out of a job. Because of the current employment situation in the country, many are finding that it takes longer to find a new job and therefore, you would need more savings put aside to get you through the lean times. Three to six months’ salary is a long term savings goal that will get most unemployed individuals by until they become re-employed.
Even if that amount seems daunting to you, set aside some money every paycheck for your emergency fund. Having two weeks of savings is better than having none. Knowing that you have some money for a rainy day will give you peace of mind in an uncertain economy. SAVE – SAVE – SAVE!
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Tags: emergency fund, Saving Money
This entry was posted on Tuesday, June 23, 2009 at 5:57 am and is filed under Financial Education, Financial Goals, Frugality, Investing in Real Estate, Retirement Planning, Saving Money, Wealth Building. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
2 Responses to “Emergency Fund: How Much Do You Really Need?”
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Trey - Swollen Thumb Entertainment Says:
Good reminder that there is no “paint by numbers” answer for everyone. We need to assess what our individual lifestyles and finances say about our needs should we become unemployed. But yes, the most important thing is to get started on saving, because that’s the number one thing preventing people from creating an appropriate emergency fund!
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Mack jackson Says:
September 7th, 2009 at 3:49 am
There is a great possibility of unexpected expenses for which you should keep some money as emergency fund. Post is giving great detailed knowledge regarding emergency fund, it will help the people who is having some less idea about it.
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