How Large Should Your Emergency Fund Be?
Whether we have one or not, we all know that we should have an emergency fund. But ask ten people how large that emergency fund should be and you will likely get ten different answers. For a long time the standard was three months worth of your salary. Then it became three to six months. Then with the poor economy of the past couple of years, some financial experts recommended six to twelve months. If only it were that easy!
I think that the amount of emergency fund that a person should have will vary greatly depending on a lot of things. You need to consider how secure your job is. My husband is a teacher and is tenured. We have always felt comfortable with a smaller emergency fund than most experts recommend. If you work in a volatile market that is prone to layoffs, you will want a larger savings account. Consider what type of work you do - is it seasonal or dependent on the weather? Is there always a demand for it? Would you have to move out of state to continue doing it if you lost your job? Is it dangerous? These are just some of the things to consider.
Something else to think about is your expenses. If you have a large mortgage payment and two car payments, you will need a lot more money in a savings account if you were to lose your job or become disabled. If you have no debt other than a small mortgage, a smaller emergency fund will work for you. I don't think an emergency fund should be based entirely on your salary. I prefer to think of it based on my expenses. Our expenses are less than our salary, so if we want to have three months expenses in savings that is not as daunting a task as three months salary.
You also need to consider areas that you are willing to cut if you were to become unemployed. Maybe as a working adult you like having all the cable channels and getting your hair cut and colored every six weeks. If you lost your job would you want to live exactly the same way or would you be willing to cut some things out of your budget to make your savings stretch farther? If you are willing to cut, then you will need less money set aside to cover unemployment. If you want to keep living like nothing happened, beef up your savings account to cover everything.
Ideally everyone would have a large emergency fund to cover anything unexpected that could ever come up. It has to be individual though. Take some time to figure out how much money you should save for your emergency fund. Do some planning and start working towards getting the money set aside. It certainly won't hurt to have money in savings and it will make life less stressful for sure.
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