Emergencies are no fun, especially if you are strapped for cash. This is why almost all financial tips always include having an emergency fund in place.
But the big question is, how much should you have in your emergency fund in the first place?
There is no such thing as a definite answer here as it ultimately depends on your unique situation. However, setting aside 3 to 6 months’ worth of your present monthly income will help you stay afloat in the event of an unexpected significant expense or a job loss.
How Much Should You Save in Your Emergency Fund?
The number of months of expenses allotted in your emergency fund largely depends on your circumstances. These include your personal financial goals and habits if you are self-employed or have a stable job, and what other available funds you have in case an absolute emergency happens like your retirement savings.
Now, you are probably wondering why you should only save up a couple of months’ worth of expenses instead of saving up regularly to have more years’ worth of income in your checking account.
But again, it is a matter of financial planning. Despite having your emergency fund in an FDIC-insured and high-interest money market account, chances are you won’t enjoy significant returns after some time compared to investing the money.
It means that despite setting aside a year’s worth of money in your savings account with a high yield, it might work better for your financial goals to have this money stashed elsewhere where it will be less accessible but will have a higher return on investment or interest rates.
Scenarios When 3 to 4 Months’ Worth of Expenses are Recommended
You can survive emergencies if any or most of the following are applicable in your case:
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- You are in excellent health.
- You don’t have significant credit card debts, student loan debts, and other bills.
- You have a family or partner you can turn to during emergencies.
- Your job is stable or you work in a field where finding a new job is easy if ever you lose your current one.
- You live in an area with a remarkably low cost of living.
- You have insurance to cover all or some of your expenses if ever an illness or accident renders you unable to work at the moment.
Scenarios When 6 Months’ Worth of Expenses are Recommended
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- You’re financially responsible for children, a partner, other dependents, and pets.
- You don’t have family members or a partner who can provide support during emergencies.
- You didn’t save up for retirement or you don’t have other investments to sell if a true emergency arises.
- You have significant medical debt or ongoing medical expenses.
- Your area has a higher cost of living.
- Your line of work or hobbies is prone to accidents.
Scenarios When 12 Months’ Worth of Expenses is a Must
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- You have plans to take a leave from work while trying for a child or expecting one.
- You’re the family’s sole source of income.
- You don’t have resources or family you can turn to for assistance.
- Your income is high enough and you can easily set aside this much for your peace of mind.
- You have several debts that you can’t restructure during emergencies.
- Your job is tricky to replace if you need to switch jobs or get laid off.