Have you ever experienced a time when it seemed there was never enough money in your bank account? Something unexpected comes up and you think: How am I going to pay for this?
Unexpected things happen and that’s why having an emergency fund may come in handy. An emergency fund is money that you keep aside to cover unexpected expenses. How much money should you have in your emergency fund?
The textbook answer tends to be enough money to cover three months of expenses if you have two-person household with two incomes or six months of expenses if you are a single person or in a household with one income.
However, the reality is that life and textbooks do not always align because unexpected things happen. As a result, the answer to how much you should have in your emergency fund may be more nuanced because your lifestyle and financial situation need to be considered.
Last month, I shared how financial planning is a collaborative process and asked you to try out the following equation with your information: Assets – Liabilities = Net Worth. For your emergency fund, the asset to consider is the one that is readily accessible: cash.
Write down all the expenses you expect to pay in a month (your mortgage or rent, electric bill, car payment, insurance premium payment, etc.) or use resources that track your account balances and/or spending over time (ex. spreadsheets that integrate data from your bank or an app your bank offers).
Add up those expenses (or, if you are using a spreadsheet or app, take the average amount of monthly expenses).
Take that figure and multiply it by the number of months that apply to your situation: 3 months for a two-income household or 6 months for a one-income household.
Your result gives you a general idea of how much money you should have in your emergency fund.
Where should you keep your emergency fund? The answer to this question also involves an element of nuance because it also depends on your lifestyle and your financial situation. However, the typical answer is a savings account at your local bank or credit union.
Looking at your result, consider whether that number makes sense to you. Do you have that much cash right now? What regular habits can you begin to practice to reach that number? Is that number as accurate as you would like for it to be? Do you have a place to keep your emergency fund?
A conversation with a CERTIFIED FINANCIAL PLANNER™ may help you to understand how much you should have in your emergency fund and how your emergency fund impacts your overall financial plan.
Written by Wendolyn Forbes, CFP® originally printed in Positively Haywood by Vicinitus, Vicinitus.com