How Much Money Should I Set Aside for Emergencies?
No matter who you are, an emergency of some kind will affect you at some point in your life. Unfortunately, few people are prepared when disaster strikes. And that’s especially true when it comes to financial emergencies.
Financial emergencies come in all shapes and sizes. Job loss is a big (and increasingly common) one, as is disability. The need for car repairs is not as devastating, but if you count on your car to get back and forth to work, it’s something that must be taken care of immediately. Even the death of a major appliance can strike a severe blow if you don’t have an emergency fund.
We all know that it’s smart to have some money socked away for a rainy day. But we don’t all make an effort to do so. A common reason given for lack of an emergency fund is that one can’t afford to save money. But if you think about it, you really can’t afford not to. If something were to happen and you didn’t have any money to take care of it, your only alternative would be to use credit. And that’s not always an option.
Finding money to put toward an emergency fund is not as difficult as most people think. If you eliminate unnecessary expenses from your budget, you should be able to find at least a little money to set aside each month. Even if it’s just $10, it’s a start. But how much should one aim to accumulate in an emergency fund?
Experts have differing opinions on how large an emergency fund should be. Some say you should have three to six months’ salary. Others say enough to cover your minimum expenses for three to six months. And still others argue that you should not work on an emergency fund until you’ve paid off any credit card debt you have.
The truth is, there’s no one-size-fits-all answer. How much you need in an emergency fund depends on a number of factors. If you’re single and in a high-demand profession, you might be able to get by with less than a family man in a less dependable occupation. If you’re self-employed, you may need more than most people because you won’t be able to fall back on unemployment if you run low on work. If you’re retired, you might need more than someone who’s still in the workforce. And if you don’t have adequate health and disability insurance, it’s very important to have a large financial cushion.
Still, the guidelines provided by financial gurus are helpful. It is certainly a good idea to have at least enough money put away to cover necessities and minimum payments on bills for a few months. And if you have accumulated a large amount of high-interest debt, it might be wise to save up $1,000 or so and then work on paying off your balances before continuing.
No matter how much money you make, having an emergency fund is essential. Even if it’s only a month’s salary, it will help prevent small emergencies from striking a crushing blow to your finances. And it’s okay if building up an adequate fund takes a while. With each little bit you put away, you become a little more financially secure.