How Much do You Really Need in Your Emergency Fund?

Saving up an emergency fund is one of the best things you can do to prepare for unexpected expenses. Conventional wisdom says that you should save up at least three to six months’ worth of expenses.

That’s a lot of money. If you don’t earn Silicon Valley wages or if you’re just starting out from scratch, that can seem like an impossible amount to save, so why even try? But, try this on for size: Maybe you don’t necessarily need to save that much. It all depends on your personal situation.

Luckily, we’ve broken things down to help you decide what’s the right amount for you to save in an emergency fund.

How Much Money Should I Save?

The answer to this question is: It depends.

As with all rules of thumb, the three-month minimum emergency fund rule is a one-size-fits all prospect. For most people, this is great advice, and it’s infinitely better than no advice at all. But there are certain factors about your specific lifestyle and personal situation that may make you lean towards more – or less – than a three-month or six-month emergency fund.

We’ll walk through some considerations here, but in general: The riskier your situation, the more you need to save. If your situation is a little less risky, you may be able to get away with saving less.

Take a look at four questions to ask yourself when determining how much money to save:

1. Is Your Job Secure?

One of the biggest factors to think about is how stable your job situation is. After all, one of the biggest uses of emergency funds is to help you cover your costs if you lose your job. So, consider both your specific job situation and your industry in general.

If you’ve been working at your job for a long time, you may be more immune to layoffs or other unfortunate events.

Also, take a look at how your employer is doing. Do you think the company will be in business six months from now? Lastly, if you’re a freelancer, you may also want to consider saving more money since this is one of the most shaky forms of employment of all.

As far as your industry goes, consider whether it runs on a cyclical cycle. After all, the construction industry is booming right now and you may be able to find a job as a carpenter fairly easy, but five years from now it may not be the same story. The same thing goes for automation — is your job at risk for robots taking it over? If so, consider a larger emergency fund.

2. Are Your Specialized Skills in High Demand?

If you went to college or trade school to learn a specific, specialized skill, that’s supposed to help you find a job. And if you live in an area where that skill is in high demand, chances are you can find employment quickly if you lose your job. But if you live in an area where it’s not in high demand — or if jobs in your field are scattered around the U.S. — consider saving a bit more than normal.

3. How Much do You Need to Feel Comfortable?

Another consideration is simply how much money will make you feel safe. Maybe you’ve been burned in the past with outrageous home repairs, or a lemon (car) to end all lemons. If you would feel more secure and sleep better with a larger emergency fund, then go for it. If you’re OK playing with a bit more risk, then consider cutting back a bit.

4. What Type of Lifestyle do You Lead?

If you lose your job, your emergency fund is meant to tide you over until you can find gainful employment again. Most people recommend cutting back your expenses so that you can stretch your emergency fund as far as possible in this case.

But, consider this: Do you want to live the lifestyle of an ascetic monk while you’re job hunting again? Maybe you still want to go out with friends, or more importantly, attend networking opportunities.

In this case, it might be wise to err on the side of saving more money so that you can still afford these things. Conversely, if these factors don’t matter to you as much, you can get away with saving less.

Needs vs Wants: A Lesson in Essentials Assessment

Even if you don’t want to bump up your savings target to include everyday lifestyle expenses, you at least need to save a minimum amount. And for everyone, this amount will be different, because everyone has different needs.

To figure out what your basic needs are, tally up all the things that you really need to be able to continue on living. Things to include are:

  • Rent/mortgage
  • Necessary utilities (electricity, gas, water, cell phone, Internet, etc.)
  • Groceries
  • Transportation expenses

On the other hand, consider what you can cut out of your budget should you lose your job:

  • Restaurants
  • Unnecessary utilities (cable, HBO, etc.)
  • Entertainment
  • Fun money

Don’t Overfund Your Emergency Savings

We’ve given you some things to think about when deciding how much to save in your emergency fund. But also consider this: It is also possible to save too much money in your emergency fund.

For example, if your emergency fund is the only savings fund you have, you’re missing out on a lot of opportunities to save for other important things — namely, retirement. It’s a good idea to make sure you’re still saving money for your retirement, whether in a workplace 401(k) plan or an IRA. You may also have other goals you’re saving for, such as health care, vet bills, or a new car.

A Cash Reserve is Essential

Whether you choose a three-month or six-month emergency fund, one thing’s for sure: You do need a cash reserve of some sort and you can use this guide as a primer to help you figure out how much you need to save.

Also, keep in mind that no matter how much you decide to save, the most challenging thing is to get started. Once you get going, however, you can rest a bit easier. Just think: Even if you don’t have a fully-funded emergency savings account yet, every bit you save today will help keep you protected in the future.

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