Emergency funds can really save the day when you’ll need it. It can be tough however to know how much to keep saved. According to a popular rule of thumb, you should aim for between three and six months’ worth of expenses. But in some circumstances, you may want to save up to 12 months’ of living expenses. Here is how to determine how much you need.
How much money I need for an emergency ?
To determine that, we need to take into account the likelihood of an emergency. For example, what are the chances of your car break down next month? If your roof starts leaking, will you have to pay to fix it? Can you be fired of your job and stay jobless for quite some time?
The rule of thumb
A good rule of thumb to give yourself a solid financial cushion is to have at least three months essential outgoings available in an instant access savings account. For example, if you lose your job, it’ll give you three months breathing space.
So, if you spend 1,000EUR a month on mortgage or rent, food, heating bills and other things you can’t live without, you might aim for 3,000EUR in emergency savings.
But this rule must be changed and adapted to your personal life. Here are some examples:
Your situation is stable: 3 months+
Saving three to four months’ worth of expenses might be enough if:
- You’re healthy
- You don’t have much debt
- You live in a low cost-of-living area
- You rent and your car (if you have one) is reliable
- Your job is “safe” and pay regularly
- You could easily find a job if you lose your current one
- You don’t have kids or dependents (including furry ones) relying on your income
- Your job is very stable
- You have a partner or other family you can rely on for financial assistance
Your situation is stable, but can change rapidly: 6 months+
- You live in a high cost-of-living area and can’t move
- It’d be hard for you to find a job if you lose your current one
- You own your own home (especially if you have an older home)
- Your rent take a good chunk of your income
- Your job isn’t very stable or irregularly paying (you’re a seasonal worker, gig worker, or an artist)
- You have children, a stay-at-home spouse, pets, and/or other dependents you have to support
- You have a medical condition, or do high-risk activities
- You lack a financial support network
Your situation is instable: more than a year
- You have a high income, and high expenses you can’t cut fast enough
- You have a niche position or specialized job that might require relocation or take extra time to replace
- You are the sole provider to multiple dependents
- You are retired or are nearing retirement
- Your job is on the line
- You don’t have any insurance
Of courses these are not absolute figures, and you’ll have to adapt to your very own situation and lifestyle, but I hope now you get the idea.
These figures may seems high, but don’t worry, there is a way to build up your emergency fund almost effortlessly. Keep reading and build your emergency fund now, before that decision hit you back at the worst time possible.
How to build up your fund
Now that you know how much you need, let’s soon how you can put it aside. While it’s a good idea to set up your emergency fund as soon as possible, it’s best to keep to what you can afford and try to save regularly. If you try to save that much of money at once, you’ll probably fail and bail out of that idea.
What you need to do instead, is to develop an habit of saving regularly, and saving BEFORE doing any spending. Saving smaller, regular amounts is often more effective than saving larger amounts now and again. This is because you get into the savings habit, and you’re not overcommitting too much money. It also lets you budget your spending from week to week or month to month more effectively.
To stay motivated in the long run, remember that every bit you save can make a huge difference. You can also try visualising your end goal. Whether you’re preparing yourself against a car breakdown or replacing an expensive item like the cooker or washing machine, it will help you keep focused and on track as well. Keeping track with a chart up on the wall might help !
Remember, the sooner you start, the easier it’ll be ! As I like to say, the best day to start was 10 years ago, but the second-best day to start is just today.