No one likes to think about emergencies happening to them, such as medical injuries, lost jobs, and car breakdowns. Unfortunately, these kinds of emergencies can cost substantial amounts of money to resolve. If you don’t have an emergency fund established, you won’t be financially able to overcome an emergency when it strikes.
Emergency funds are money you put into savings for emergencies only. Many people who establish an emergency fund will contribute about 10% of their income each month. As time passes, the emergency fund grows to a large amount that could cover several expensive emergencies, such as medical bills, lost income, and car repairs.
How Much Will You Need for Your Emergency Fund?
Everyone will have a different emergency fund based on their circumstances and the level of risk in their lives. Below are four helpful tips for calculating how much you will need to save for your emergency fund:
1. Add Up Your Monthly Expenses
You must first calculate your total monthly expenses if you haven’t already done so. Knowing your total monthly expenses will give you a clearer indication of how much money you will need to put into an emergency fund to cover your living expenses for one or more months.
Severe emergencies, such as physical injuries, could keep you in the hospital for an extended period. That means you cannot work to generate income until you are healed. The only way to pay the bills would be to rely on your emergency funds to cover them until you get back on your feet.
2. Assess Your Emergency Risks
Which type of emergency are you more likely to experience? Of course, everyone is at risk of physical injuries due to car accidents and other violent incidents out of our control. There is also a fair risk of your car breaking down unexpectedly and requiring you to pay for expensive repairs to get it moving again.
Assess all your potential emergency risks and determine how much each would cost you to resolve or overcome. Ask yourself these types of questions:
- Are you a younger person less at risk of suffering a health condition?
- Are you renting a home without any responsibility for making repairs?
If you answered “yes” to both, you probably won’t need to save as much money in your emergency fund as someone older and owns their home. The reason is that older people are more likely to suffer a health condition and need to pay for home repairs. So, they would need more stashed away for emergencies than someone younger and healthier who doesn’t own a home.
3. Three to Six Months of Emergency Funding
Emergencies can last a few days or several months. You’ll never know how long they will last until an emergency presents itself. The best thing to do is to create an emergency fund to pay all your bills and living expenses for the next 3 to 6 months. That should be enough time to resolve most emergencies before you can generate an income again.
Remember that your emergency fund must pay for everything, such as your rent (or mortgage), groceries, utilities, car (or public transportation), insurance premiums, debt payments, etc. If you have already figured out your monthly expenses, multiply them by 3 to 6 times. That is how much money your emergency fund will need to prepare for emergencies.
4. Consider Your Current Job Position
Do you work a regular 9-to-5 job or make money as a freelancer? The answer to this question matters because it will significantly factor into how much you should save for an emergency.
For example, suppose you are a freelancer and run into an emergency that puts you out of work. In that case, there is no telling how long it will take to start making money again. Since freelance income is inconsistent, winning back your clients and building your business could take several months. In this case, you should have an emergency fund to pay up to six months of living expenses.
On the other hand, if you have a steady 9-to-5 job with more income security and worker’s compensation, you can probably bounce back from an emergency much faster. In this case, you might only need about three months of living expenses covered in your emergency fund.
Tips to Save for Your Emergency Fund
Saving for an emergency fund is easier said than done. It requires extensive financial planning and discipline to put enough money aside to meet your emergency funding goals.
Here are some things you should consider to save for your emergency fund:
High-Yield Savings Account – Establish an emergency fund by keeping your money in a high-yield savings account. It will allow you to earn sizeable interest rates on the money you hold in your account.
Reduce Non-Essential Expenses – Avoid making unnecessary purchases, such as dining out at restaurants or purchasing many streaming subscriptions. Free up as much of your available income as possible to devote to your emergency funding.
Start Side Hustles – Besides your primary income source, you could start extra side hustles to earn more money for your emergency fund. Some reasonable ideas for a side hustle include selling a particular service online, driving Uber in your local area, or reselling items bought from a thrift store. There are many freelancing opportunities available nowadays.
Automate Savings Deposits – Set up automatic payments into a savings account for your emergency fund. It could mean setting up automatic payments from your paycheck or checking account into the emergency fund. Automating the payments will ensure you don’t forget to keep adding to the fund.
Conclusion
The amount you need to save in emergency funding depends on factors such as your age, health status, expenses, and income level. The rule of thumb is to devote 10% of your income toward an emergency fund. Still, you may need a percentage based on your current circumstances.
It is essential to stay consistent in growing your emergency fund so that it can bail you out of an emergency when it arises.
