Photo: Vitalii Vodolazskyi (Shutterstock)
While most financial professionals agree that a total of three to six months of spending should be set aside for emergencies, this advice can be pretty far-reaching – especially with such a large sum of money. Here’s a look at what barebones expenses should be included in your emergency fund and how to know if you should be aiming for just three months, six months, or even more.
What is an emergency fund?
A Emergency fund is a cash reserve that covers financial emergencies such as job loss, unexpected medical bills or vehicle repairs. Unlike higher risk investments like IRAs or 401 (k) s, an emergency fund can be withdrawn on short notice with no penalties or fees. It is generally recommended that you set up your emergency fund before you start investing. However, if you’re struggling to keep up with high-yield debt (over 10% APY), pay it off first.
How to calculate your emergency fund
Experts recommend setting aside expenses for three to six months. Living from paycheck to paycheck may sound a little like a joke, but it can help focus on more short-term goals and then build your emergency fund. For example, you can start with a three month goal by writing down the totals for the monthly expenses you will have to pay:
G / O Media can receive a commission
- Housing / rent
- Health insurance
Expenses that you wouldn’t include (at least not yet) would include the monthly “Nice to Have” expenses like this:
- Entertainment (including streaming subscriptions)
- Other savings
To help you add up the expenses, consider using this Emergency Fund Calculator powered by Fool.com. In the process, you might be surprised by some hidden expenses that can be diverted into an emergency fund, like a stray subscription service that you hardly use or money that is spent on restaurant meals. In either case, the goal is to set up a portion of the savings that will be used to replenish your emergency reserves.
There’s no consensus on how fast to build your emergency reserve, but since it’s for emergencies, the faster you can do this, the better (a reasonable goal would be to spend at least a month in a year). Starting from scratch should save $ 1,000 as an achievable starting goal (only 40% of Americans saved enough money to cover an unexpected $ 1,000 expense).
Follow the 3/6/9 rule
Since spending for three to six months is a wide range, so should that 3/6/9 rule to find out how much to save in your emergency fund:
- Save three months on expenses if: You will have a secure job, a steady paycheck, minimal debt, and live alone with no mortgage or dependents. You can get away with a much smaller emergency fund if you always have the option of living with your parents as a last resort.
- Save six months on expenses if: They have children and large debts such as mortgages and student loans. With dependents, you will need more pillows.
- Save nine months on expenses if: You have an insecure job or an irregular income, e.g. B. Contract or freelancer. If you have children and are the sole breadwinner in your family, ideally you will have a cash fund to cover expenses for nine months.
Where should you keep your emergency fund?
The most important thing you need in an emergency financial fund is liquidity – the ability to access that cash quickly with no penalties or fees. Because of this, you would keep this money in a savings, checking, or money market account instead of locking it in an investment like an IRA. This Lifehacker post will walk you through your options.