While most financial experts agree that you should set aside emergency cash totalfor three to six months of your spending, this advice may be enough vast-especially for such a large sum of money. Here is a preview of the nudeBONE expenses which should be included in your emergency fund, and how to know if you should be aiming for just three months, six months, or even longer.
What is an emergency fund?
a emergency fund is a cash reserve that will cover the emergencies like loss of employment, surprise medical bills or vehicle repairs. Unlike high-risk investments like IRAs or 401 (k), an emergency fund can be withdrawn at short notice with no penalties or fees. It’s generally recommended that you set up your emergency fund before you start investing, but if you’re struggling to meet high interest debt (over 10% APY), you’ll want to pay it off first. .
How to calculate your emergency fund
Experts recommend setting aside three to six months of spending. If you live from paycheck to paycheck, it might sound like a bit of a joke, but it can help you focus on shorter-term goals and then build your emergency fund as you go. . For example, you can start with a three-month goal by noting the total monthly spend you need to pay:
- Housing / rent
- Health iassurance
Expenses that you wouldn’t include (at least not yet) would include monthly “nice to have” expenses, like this:
- Entertainment (including streaming subscriptions)
- Other savings
To help you add up expenses, consider using this emergency fund calculator provided by Fool.com. In doing so, you might be surprised at some hidden expenses that can be diverted to an emergency fund, like a misplaced subscription service that you barely use, or money spent on restaurant meals. In all cases, the goal is to build up part of the savings dedicated to supplementing your emergency reserves.
There’s no consensus on how quickly you should build up your emergency reserve, but since it’s for, well, emergencies, the faster you can do it the better (a reasonable goal would be at least a month of spending in a year). If you are starting from scratch, consider saving $ 1,000 as an achievable starting goal (only 40% of Americans have enough money saved to cover an unexpected expense of $ 1,000).
Consider the 3/6/9 rule
For three To six months of spending is a wide range, you can also consider the 3/6/9 rule to know how much you should save in your emergency fund:
- Save three months of expenses if: You have a stable job, a stable salary, minimal debt, and you live on your own without a mortgage or dependents. You can get by with a much smaller emergency fund if you also still have the option of living with your parents as a last resort.
- Save six months of expenses if: You have children and carry large debts like a mortgage or student loans. With dependents, you will need more than one cushion.
- Save nine months of expenses if: You have a precarious job, or have irregular income, such as a contract or freelance work. If you have kids and are the sole breadwinner in your family, ideally you have a cash fund that covers nine months of expenses.
Where to keep your emergency fund?
The most important thing you will need in a financier the emergency fund is liquidity—the ability to access that money quickly, without penalties or fees. This is why you would put this money in a savings, checking, or a money market account, rather than locking it into an investment like an IRA. This Lifehacker article will walk you through your options.