I’ve been thinking about this for awhile. How much does one need for an emergency fund? You hear all kinds of figures. Back in the 1980’s (yes I am old enough to remember them!), some people said you needed 1 month’s pay for an emergency fund. Then that got bumped up to 1-3 months. Now I am hearing 6-12 months. Wow, that is quite a range!
An article over at the The Consumerist sites U.S. News & World Report that 50% of Americans are just 2 paychecks away from financial problems. 28% of Americans have less than 2 weeks of savings, with another 22% having 2 weeks to 1 month.
So what should we set aside? Here is a brief list of things to consider:
- How big is your family? Naturally, the bigger the family, the larger your reserve should be.
- How big are your fixed expenses? Things like mortgage payments, car payments, or any regular expenses that do not vary from month to month. Again, the bigger this number is, the larger your fund should be.
- What are your variable expenses? Things like electricity, food, and other expenses that increase the more you use them. What is a normal range or average amount you pay? Again, the higher the amount, the larger the emergency fund.
- How much control do you have over variable expenses? The more control you have over them, the less you will need to have in your emergency fund.
- Are there viable alternatives you can turn to to reduce expenses? Can you move in with family or friends instead of renting. Can you sell the car with payments on it?
- How steady is your employment picture? Are you in a high risk industry or occupation noted for layoffs (of course we are all wondering that now)? If you are married, do you and your spouse both work? Can you make it on just 1 paycheck? If your spouse does not work, could they start?
- What expenses can be lowered or dropped in a financial emergency situation?
- What liquid assets (assets that can be easily turned into cash) do you have, or what assets do you have that could be used for income either by renting or selling?
By knowing these things, you can begin to put together a plan for how much you will want to set aside for an emergency fund. The next step then is to determine how many weeks or months you want this emergency fund to cover. Again, things like job security play a big part in this.
The goal is not to cover everything – but what is necessary for the length of time until income will be resumed.
Currently, I am aiming for 3 months worth of my “necessary” expenses.
What is your goal?
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“An article over at the The Consumerist sites U.S. News & World Report that 50% of Americans are just 2 paychecks away from financial problems. 28% of Americans have less than 2 weeks of savings, with another 22% having 2 weeks to 1 month.”
That adds up to 100%, so it can’t be true. At least I have 1+ year of savings.
As unemployment rate goes up to 10%, everyone who can be fired needs at least 12x monthly expense to be considered safe.