Let’s face it, emergencies seem to happen at the worst possible time. Whether it’s an unplanned medical procedure, a car repair, or a lost job, not being prepared can leave you in a very scary financial position. That’s where an emergency fund can come in.
How big emergency fund do I need
But how much money do you need to save in your emergency fund? And, in what type of savings account should you keep it in? According to most experts, it’s important to keep between three to six months’ worth of your living expenses in an emergency fund.
That way if you or your spouse suddenly loses your job, you’ll have ample time to get back on your feet before you run out of money. That way, even small emergencies, such as new tires or a home repair, will be covered.
Your line of work, and the city that you reside in, will help you determine whether you need to be on the higher or lower end of that three to six-month recommendation. For example, if you live in a city where there are many jobs in your industry, then three months may be enough. If not, you may want a bigger fund that will allow you more time to find the right position.
Three months emergency fund
Another important rule of thumb in preparing your emergency fund is to take a close look at all your living expenses. Simply add them up and multiply that number by the number of months you’d like a cushion for. So, if your living expenses are $4,000 a month, and you want an emergency fund for three months, you’ll need a $12,000 cushion to keep in the bank.
Also, you’ll want to get immediate access to your emergency fund, if necessary. That’s why you should keep the fund in a savings account at your local bank or credit union. Having it tied up in a CD or an IRA makes it harder to access quickly, and can incur taxes upon withdrawal.
Making a budget
When it comes to starting your emergency fund, the sooner you begin the better off you can potentially be. Therefore, if you’re on a limited budget you’ll want to start small by saving at least a hundred dollars each month. You can do this simply by having a small automatic transfer made from your checking account to your emergency fund – so you won’t even notice it.
It’s also important to keep in mind that you’ll want to balance your debt with saving for an emergency fund. If you have high-interest credit card debt it’s vital that you build your emergency fund at the same time you pay down your debt.
Decreasing the debt
A good rule of thumb is to pay down 70% of your high-interest debt while putting 30% into your emergency fund. That way as your debt decreases, the amount you can save will increase. And in time you’ll find yourself debt-free and well-prepared for the next emergency that always seems to be right around the corner!