Emergency funds are one of those things, like car insurance or a repair warranty, that feels painful to fund or pay for but comes in super handy when you find yourself in a financial rut, car accident or when something goes wrong with your TV. I can promise that you will never look back and say, “I wish I hadn’t set aside that money in case of an emergency.”
Unexpectedly, millions of people around the world have found themselves in the middle of a global emergency with COVID19. This virus has overwhelmed the heath system, taken far too many lives and, almost overnight, took a toll on the markets and our personal financial well-being. Layoffs and reduced hours have many struggling without any emergency savings to fall back on.
Out of curiosity, I recently polled a working mothers networking group on social media and asked the question: Do you have an emergency fund of between 3-6 months living expenses? The answers from 898 respondents fell into three categories:
While each person’s emergency fund needs will vary based on individual circumstances, you’ve probably heard the general rule of thumb suggestion to have between 3 and 6 months set aside in cash or an asset that can be liquidated quickly and without loss of value, in case of an emergency.
You might be wondering, “Okay, but what does that mean for me?”
There tends to be a large monetary difference between 3 and 6 months of living expenses, especially depending on what you include in that figure.
In general, you only want to include your combined fixed and variable living expenses when calculating your monthly total. Discretionary expenses such as a daily Starbucks run and weekend date nights to the movies are not to be included. If you find yourself in a situation that requires you to tap into your emergency savings, you’ll want to cut out or limit as much discretionary spending as possible and the goal is to tap your emergency savings only for expenses directly related to an unexpected emergency.
Expenses that should* be included in your monthly living expense figure:
*At the end of the day, everyone needs to personalize their own budget to their own expenses. You may have additional expenses that need to be added.
Here is a simple guide to help you determine how many months of living expenses you should aim to save for in your emergency fund:
REMEMBER Rome wasn’t built in a day; it took 1,000 years!
Building an emergency fund can feel like a long and slow process and three to six months of living expenses can seem like an unattainable number. The idea is to put a small amount away each week or two and before you know it, you’ll have a fully funded emergency savings.