How big should your emergency fund be? Answer these 4 questions to find out

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Don’t be left with too little emergency savings.


Key points

  • An emergency fund can help you avoid debt or financial disaster.
  • Consider your job security, health status and living expenses to help set your savings goal.

Almost all financial experts agree that having emergency savings is important. But how much exactly to put in an emergency fund is a more contentious issue. While some experts recommend an even larger fund, the most common advice is to save three to six months of living expenses in case of an unforeseen emergency. But even that is quite a wide range.

If you’re trying to figure out how much money you should have in a savings account for a rainy day, asking yourself these four questions could help you get the answer you need.

1. How stable is your work?

Loss of income is one of the biggest events that emergency funds protect against. If you lose your job, you still have to pay your bills, like your mortgage and car payment. An emergency fund makes this possible.

If you have a really stable job, the chances of you having to rely on your emergency savings to cover your bills for long periods of time are not very high. Likewise, if your skills are in demand and you are sure you can find a new position quickly, a smaller emergency fund may be appropriate.

But if your job situation is precarious and there’s a chance you’ll see paychecks suddenly stop reaching your bank account, it’s probably a good idea to err on the side of a large emergency fund. which could help you keep your financial life running while you look for new work.

2. How is your health?

If you get sick, you may find that your income is reduced because you can’t work at all or you have to cut back on your expenses. You could also incur a lot of medical expenses, even if you have insurance, as treatments may not be covered or you may have high co-insurance costs.

An emergency fund can help cover bills while you recover from illness, and it can help pay for the health services you need. If you face a higher risk of a medical problem developing soon, a larger emergency fund with six months to a year of living expenses may be preferable to a smaller fund.

3. How much are your essential expenses?

Since you want your emergency fund to cover a certain number of months of expenses, you need to know your actual costs. To determine your budget, consider everything you would like and need to spend in an emergency.

Once you’ve added up your essential expenses, you can multiply that amount by three months, six months, 12 months, or some number in between, depending on your answers to the other questions on this list. Let’s say your costs total $3,000 per month and you’ve determined that you want to save six months of expenses to cover them. In this case, you should have $18,000 on hand.

4. How risk averse are you?

Finally, consider your comfort level with taking risks. If you’re okay with running the risk of having to sell items, take on extra work, or even go into debt to cover emergency expenses, a smaller emergency fund may be acceptable. But if you want extra peace of mind, you might want to save enough to cover yourself for a year in case anything goes wrong.

By considering your willingness to take financial risks, your health, work situation, and ongoing costs, you can make the right choice about the size of emergency fund that’s right for you.

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