An emergency fund is one of the least sexy but most important financial tools that you can have. Financial advisors and professionals disagree on an entire host of issues like how much to put into retirement, how to use/not use debt, student loans, mortgages, etc. But the one financial fundamental that we pretty much all agree on is the importance of an emergency fund. Let me explain why it is so important to your financial health.
How Much You Should Have in an Emergency Fund
Although financial professionals don’t really disagree as to the importance of an emergency fund, they do sometimes disagree with the amount that should be in the emergency fund.
But here is my guidance.
As a general rule you should have somewhere between 3 months of your expenses and 6 months of your expenses saved in an emergency fund.
This will vary based on your specific situation (I’ll get to that in a minute). But this is general guidance.
And to be clear, it is 3-6 months of your EXPENSES, not income.
So if you add up all of your bills and they are $4,000/month, you need a minimum of $12,000 set aside for emergencies.
If you are pretty risk averse and want to put even more money away than 6 months then that is good also. It will just take some time.
If you want a deeper dive into whether you should err on a 3-month emergency fund or opt for the larger 6-month emergency fund, here is an article that can help you choose.
That might seem like a daunting task, and I get it. It was for me as well at one time. But over time, you will get there. The important thing is that you start saving NOW. It is not a matter of IF you have an emergency, but a matter of WHEN you have an emergency.
Covering a $1,000 Emergency
Here is one of the scariest financial statistics out there IMO.
Currently 57% of Americans are UNABLE to cover a $1,000 emergency.
That. Is. Scary.
At the end of the day, $1,000 is not a ton of money, especially considering how quickly that can be eaten up when you have an emergency.
The days of having a $1,000 emergency fund as proposed by Dave Ramsey are gone. Life is simply too expensive to keep only that small amount in your savings account until you pay off all of your debt.
And in fact, most people don’t even have that much.
Typical Emergencies
Here are some typical emergencies that you will most likely have:
- Vehicle replacement.
- You will have to replace a vehicle. The typical time that someone has to replace a vehicle will be every 6 years. And in between the times that you replace vehicles, you will have to have maintenance and repairs done. And a lot of those repairs will be unforeseen.
- Medical Emergency.
- You will have a medical emergency at some point. Either for you or someone in your family. The average emergency room visit is about $2,200. You need to be prepared for this. Especially because if you have to go to the emergency room, that is likely just that START of medical bills.
- Losing a job.
- It doesn’t have to be in a recession. But people lose their jobs unexpectedly all of the time. In fact, 40% of people will be fired from a job during their working lifetime. Make sure that you are able to pay for your bills for a while in the event that you are terminated.
- Home repairs.
- You will have them if you own a home. Be prepared. The average HVAC repair is about $350. The average water heater replacement is about $1,000. And the average new roof is about $8,800. And there are hundreds of other things that you may need to fix or replace through the years. Be prepared for it.
Final Thoughts
As I was writing this, I realized that it sounds more scary than I had originally intended. However, it is important to understand the significance of having an emergency fund.
When you have an emergency, you don’t want to dip into your retirement or put in on a credit card. That will just kick the can down the road and make your life more difficult later.
I am here for you!
You can do this!
Until next time!
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