September 2nd, 2013
How Much Should You Really Save in Your Emergency Fund?
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**Today’s guest post is contributed by Abby.**
You’ve probably heard that your emergency fund should contain about three to six months’ worth of expenses. At least, that’s what most of the financial gurus say.
But there’s a big difference between three months’ worth of expenses and six months’ worth of expenses. So which end of the spectrum do you fall on? Or should you actually save more or less?
Like other rules of thumb for your money, this one is flexible, and you should consider your own unique financial situation when setting an emergency fund savings goal.
So how much should you actually save in your emergency fund? After you think through this list of considerations, you can set a goal that’s right for you:
Are you a freelancer, or are you steadily employed? Is your company financially stable? Do your paychecks vary, or are they the same each month? How long might it take you to find a new job if you lost yours?
Basically, the more stable your job and steady your income, the less you need in your emergency fund.
If you’re a freelancer who’s always hustling for the next client, you should have a relatively large emergency fund. But if you’re unlikely to lose your steady, salaried job, you may be able to get by with a smaller emergency fund.
Also, do some research in your career field. How many job openings are there in your area of expertise? The easier it would be for you to find a new job, if necessary, the less you’ll need in your emergency fund.
Yes, we all learned in the recession that there’s no such thing as a 100% secure job or career field, but some jobs are more reliable than others.
Your Other Income Streams
If your spouse also works, chances aren’t likely that you’ll both lose your jobs at once. So run some numbers to see how far the smaller of your two incomes could take you. If the smaller income could pay most of your essential monthly bills, you could scale back your emergency fund goal a bit.
Whether you’re married or single, you might have other income streams or potential income streams to look at, as well.
Say you’re running a side business right now. Maybe it’s not making much money, but could it make more if you turned it into a full-time gig (either because you decide to, or because you lose your day job)? If your side business is making good money or has solid potential, you may not need as much in your emergency fund.
One more income stream to consider: rental properties. If you’re currently maintaining one or more rental properties, you’ll actually need more money in your emergency fund than you would otherwise.
Your emergency fund has to include enough cash to cover unexpected maintenance for both your own home and your rental properties. So even though rentals represent another income stream, they’ll increase your emergency fund goal rather than decreasing it.
Your Family Situation
Whether your family has two incomes or not, you need to look at your family situation when setting your savings goal.
If you’re single with no intention of marrying or having kids in the near future, you can probably get by on a slimmer emergency fund. It can be easier to cut expenses as a single person, and you only have one person’s potential medical emergencies to worry about.
On the other hand, if you have a passel of kids or may be adding to your family in the future, you should definitely slide to the higher end of the emergency fund spectrum. In this case, you’ve not only got more mouths to feed, but you’ve also got more potential hospital co-pays to cover!
As your children fly away from the nest, you may consider scaling your emergency fund back. Put some of those liquid assets into better-earning investments, or take yourself on a nice vacation. But while you’ve got a house full of accident-prone toddlers or driving teenagers, a bigger emergency fund is definitely better.
Adding it All Up
As you’re setting your emergency fund savings goal, it’s wise to start somewhere in the three to six months’ of expenses (remember, it’s expenses, not income!) range, and then to adjust your goal based on these factors.
The bottom line, though, is that you should have something in an emergency fund, even if it’s only a few hundred dollars to begin with. Then, you can begin adding to that fund until you reach your total emergency fund savings goal.
Abby Hayes is a freelance blogger and copywriter who writes about personal finances for Dough Roller. She loves detailed budgets, dark chocolate and fat Victorian novels.
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