Sometimes bad things happen to good people like you.
Maybe your house catches fire, you lose your job, or you wind up in the hospital from an accident.
While these are really awful circumstances and we hope this never ever happens to you, we want to remind you that having an emergency fund can save your financial life.
But how big should your emergency fund be?
Traditional wisdom calls for three to six months of living expenses in an account that you can access easily and quickly if something in your life goes sideways, especially the loss of a job. But there's a big spread between 3 and 6 months of living expenses, and how much you put into an emergency fund depends on a lot of different personal factors from your lifestyle to your career path to who depends on you.
Here's how to calculate the amount you need to have saved up:
1. Calculate the basics. Go through your budget for the past few months and determine how much you spend on the very basic, necessary things. This includes:
- Rent or mortgage payments
- Utilities
- Groceries (not including treats)
- Insurance
- Minimum debt payments
- Gas or transportation payments
- Childcare
You don't have to include things you could live without, including streaming subscriptions, dining out, vacations, new clothes and your daily Starbucks coffee. However, you should take a close look at your medical insurance. If you lose your job, will you lose your employer-sponsored health insurance completely or could you use COBRA? How much would that cost? Do you have a spouse or partner who has insurance that you could switch to using? Find out!
2. Factor in those who depend on you. If you have people who depend on you for their basics, like children and pets or elderly parents, you'll need to factor them into your calculations. If you're a single-income household and have dependents, you'll want a bigger emergency fund than a two-income household with no dependents. Make sure you're factoring in those expenses, too.
3. Consider how long it might take to replace your income. A few questions you should ask yourself include:
- If you lose your job, do you think it will take you three months to find a new job or six months or longer? This will depend on your field and level of experience, and you should ask others in your career how long their last job-search took. In some fields, jobs are plentiful even when the economy is in rough shape, but some highly-specialized fields may take longer to hire.
- Are you willing to do a career switch if you need to? Will a different career give you the same income?
- Do you have a side hustle or gig work that you can scale up while looking for a full-time position or while switching careers?
- Do you have a spouse who can provide for the basics on just their salary?
- Are you and your spouse both at similar risk of a layoff?
Answering these questions will tell you if you can replace your income quickly and easily or not — and how long it might take you to do so.
4. Factor in post-employment payments. Sometimes a layoff comes with a severance payment, a payout for unused vacation time or unemployment benefits from your state. If you get these, they may reduce your need for immediate cash, but don't depend too much on those payments. For example, if you get fired instead of laid off, you probably won't get a severance payment.
Again, we really hope you never need your emergency fund for any reason. But we're here for you, for life, and for whatever life throws at you.
If you need help calculating how much you need in your emergency fund and how to save up for it, just call, contact us through online banking or stop by a branch. We'd be happy to set you up with one of our certified financial professionals who can help!
Or, watch the webinar recording of our partners at GreenPath as they talk about how to build an effective and sustainable savings plan for you and your family.
