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Emergency Fund – How Much Do I Need Saved?

  • September 2, 2020
  • 7 min read
  • 91 reads

Could you afford your current lifestyle without an income coming in for months? Is your bank account prepared for an economic downturn?

If the worst were to happen an emergency fund could protect you from financial ruin. Hiding away money that you do not touch unless absolutely needed can help you survive stress-free if your income was to disappear for a period of time.

Uncertain economic times have caused many of us to question how we manage our finances.

Many of us take our paychecks for granted? But what if something happened? Its never nice to talk about but life happens to all of us. The good and the bad.

With the current economic state of the world the thought of losing a job or having a life-threatening illness does seem a little close to home. Its important we discuss it, hope for the best but prepare for the worst. If jobs are lost or illness comes would you financially survive?

The way we usually live is based on our income. But what if for some unforeseen reason that income was gone. It could be due to job loss, economic downturns heck even something crazy like a pandemic. No, that would never happen (said everyone in January 2020).

Having an emergency fund set aside could save you from bankruptcy, losing your home and your lifestyle. It could be what gets you through the tough times in life.

What Is An Emergency Fund?

An emergency fund is an easily accessible sum of money set aside to be used for emergencies such as job loss, devastating illnesses, or major crisis. It is a safety net used to stop a personal financial disaster. An emergency fund must be quickly accessible in either cash or liquid investment.

An emergency fund will protect you from having to cash in your other investments or withdrawing money from your retirement fund. It’s a buffer between you and future financial ruin by protecting your portfolio.

It is an entirely separate sum of money set aside to help maintain your lifestyle if the worst were to happen.

An emergency fund is not readily available money for that last-minute vacation or that new lounge suit you saw on a black Friday sale!

    An Emergency Fund Is Not

  • It is not your 401(k)

  • It is not your retirement savings

  • It is not your investments

  • It is not your line of credit

  • It is not your savings account or your vacation money

  • It is not your stock portfolio or your rental property

Property investments are somewhat illiquid, and their value is affected by economic turbulence. This means they are not easily accessible and they can go down in value if there is an economic downturn.

Emergency funds must be liquid and readily available in the case of an emergency for that emergency only.

Why Should I Have An Emergency Fund?

Having a financial buffer ensures that when something significant happens, you do not have to rely on high-interest short term loans.

If a storm came that took half the roof of your house off, you are not going to spend weeks applying to re-mortgage your home loan, or to find the lowest fee loan available.

You are going to find the fastest loan possible to get it fixed. Those loans usually come with higher fees and interest rates, which could cause financial distress to pay them off.

Short term fast loans can be beneficial for small emergencies. But what if it wasn’t a small emergency, what if you lost your job due to an economic downturn and it took months to find a new one?

A short term loan is not going to cover months of household expenses.

How Much Should I Have In My Emergency Fund?

Financial advisors recommend starting with saving for three months of your regular household expenses. The Bureau of Labour Statistics released new average spending for US households a the end of September 2019. The average American family across the board spends an average of $61,224 annually on necessary expenses.

See the full report here.

Average Monthly Expenditure Household Example
Mortgage / Rent $979
Utilities $191
Transport $813
Food $949
Insurance $608
Healthcare $410
Monthly Expense Total $3,950
3 Month Emergency Fund $11,850
6 Month Emergency Fund $23,700

For households whose income is either from a sole earner or their incomes are unstable, Ramsey recommends working towards saving 6-months’ worth of expenses for your emergency fund.

Dave Ramsey, you may have heard of him. He wrote the book financial peace and is an expert in helping millions of people around the world build financial freedom. Dave suggests that because every household is different, individual circumstances need to be taken into consideration.

Dave Ramsey, who is the get out of debt guru around the world, recommends for double income stable earning households to have a 3-month emergency fund. Looking at the BSL data that could be around $15,000 for the average family unit.

If there is someone in your home that has a chronic illness or known high expense situation, then more money will need to be set aside to support them.

How To Save For An Emergency Fund?

Saving is simple in theory but hard in reality. The way to save is to live off less than you earn. Set a budget and stick to it.

If you are up to your eyeballs in debt getting back into the black is going to be a priority along with saving for an emergency fund.

Set a tight budget and live as frugally as possible for a little while. It’s not comfortable or fun, but it is achievable, especially when you have a goal.

Set monthly saving goals. If you have a commission check coming in or a bonus, put that money straight into your savings account for your emergency fund.

Sometimes its easier to cut expenses drastically for a shorter period and get to your goal saving amount faster than slowly chipping away at it.

Create a budget based on needs. Spend some time building your own household financial strategy that incorporates what is important to you and cut everything else out.

Where To Put An Emergency Fund?

Financer.com recommends to keep your emergency fund safe in a bank account and pretend its not there until you need it, hopefully you never will.

To most people, it seems counterproductive to have a large sum of money sitting in a low-interest bank account. However, the point of an emergency fund is not to gain high interest.

If you have it in a chequing account, have a debit card for it that you keep in a draw at home. Don’t take it with you during a BOGO sale.

You may also want to consider using a high-yield savings account for your emergency fund. While not as lucrative as other investments, their rates are relatively stable and interest rates can reach 25 times the national average. They will most likely not be available at your banking institution. However, most if not all high-yield savings account providers make online transfers a seamless and free experience; allowing for easy depositing.

For prudent savers, it is recommended to have at least a portion of your emergency fund in a bank account. Then you could consider investing the rest into a safe and liquid (easy to access) investment fund. But you need to be aware that there is always a risk of losing capital.

Wherever you keep it, make sure it is readily available for a rainy day.

We want to hear from you. Do you have an emergency fund? Are you hoping for the best but prepared for the best? Comment below.

Author Kimberley Smyth

Kimberley is the US Country Manager for Financer.com. She has gained years of experience in small business management and has two successful start-ups under her belt. She now focuses her energy on helping others achieve financial freedom through smart money management and investment opportunities.

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Last Updated: September 2, 2020

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