Don’t Listen to the Gurus — Here’s How Much Your Emergency Fund Really Should Be
It’s long been advised that everyone have a rainy day savings fund. Anything can happen in life that could instantly take a toll on our finances. Your car could break down, a pipe could bust, a leak in the roof or worst of all you cold be out of a job for more than 3–6 months (think recessions or a pandemic). Whatever the reason for needing a savings might me, having an emergency fund is a golden rule in personal finance and to achieve financial security. However, 36% of Canadians still don’t have a sufficient savings to cover atleast 3 months worth of expenses.
Even then, 3 months worth of expenses may not actually be enough for you, depending on other factors finance gurus and educators don’t consider. This article will focus on how to determine how much should be in your savings fund based on your own individual situation and style of living. If you’re just starting from scratch or just learning to save having $2,000 is a great start and a general consensus within the personal finance circle. Knowing you have a small security blanket for life’s mishaps, is better than not having a peace of mind and instead regularly experiencing high levels of anxiety and constant stress.
Take a look at all your assets
The first category you should look at when deciding on how much your emergency fund should be is determining whether you have high-maintenance assets. The biggest asset most people will acquire in their lives is a home. Why is this important? Because if you own a home there can be a lot of unexpected costs that may come over time. Some people already have this built in as a maintenance fee, but for those who own homes and not condos/apartments your maintenance bill can vary widely and can hit you at any time.
You’re not invincible and everybody has the odds of having something unexpected come up. So if you know you have valuable assets that demand responsibility and maintenance, you’ll want to make sure to account for these potential costs in your emergency fund. For example, if your roof needs repairing what’s the maximum amount it would cost to repair those damages, or if a pipe burst and you had to call a plumber? Whatever numbers you come up with would ideally be what you should have saved up. Your emergency fund can never be too much. The last thing you want to happen is to become strapped for cash and have to dig yourself deeper into debt.
Take responsibility for yourself and others
If you have children or a caretaker you want to ensure you have a slightly larger emergency fund. Even with just one child, you never know what expenses will come up over the years. Most people have already looked into having a particular savings fund for their unborn child or even funding their children’s education, so going the extra mile and just having a little emergency fund for them isn’t too far off.
For those who have children and live in a country with poor health insurance coverage, having your kids get sick could mean more bills to pay. So keep this in mind when building out your emergency savings fund.
If You’re A Boss Ass B-, Do This
For the most part if you’re self employed your finances aren’t going to be as consistent as someone who works under an employer and receives consistent paychecks. When you’re self employed, there’s potential for there to be a dry spell, you want to make sure you have a savings you can dip into for those times. Think about recessions or a perfect example COVID. We see businesses having to move from a brick and mortar to online. There may be instances where there is going to be a gap in the amount of earnings a business would make during that type of transition.
Even if you’re not self employed, the idea of losing your job could be extremely stressful if you don’t have employment insurance to cover you. Most people may also want to quit their job but can’t afford to go a couple weeks or months without working. Whatever the cause may be, having an emergency savings could help keep you afloat if your business is running slow or if you want to take a break before switching jobs. Most people don’t have that luxury because they don’t have a sufficient enough savings, and we all know that $3,000 in savings is far from enough to survive more than two months with no income coming in.
It’s just so peaceful to know that if times are rough for a month or two, you have some extra money set aside.
Insurance Coverage
Hospital bills in the states are no joke. Even for minor accidents and injuries an emergency room visits can cost you a lot of money. There are stories of people taking their kids to the hospital for being sick and coming out with a $7,000 bill. Depending on which country you live in it’s important to take a look at what the rules are around different insurance policies and how much you would have to pay out of pocket even with insurance, or what to account for in your savings if insurance cannot be a considered.
All in all, you want to be ready for whatever can come up in your life at this time and make sure that those unexpected costs are reflected in your emergency savings. Don’t just go off what some finance guru tells you or what your friends are saying. Ideally it’s good to have a place to start — say $3,000 — but you would want to grow this to a reasonable number suiting your financial situation and lifestyle choices.
Calculate your Emergency Fund
You’re going to multiply how much your expenses are each month by the amount of months you want to have available. The more financial responsibility you have the more months you should have saved up for. Everyone’s calculation is going to look different, so don’t focus on what other people are telling you, only you know for yourself.
Although, many people don’t see saving as the sexiest thing to do when it comes to money — it is probably the most important thing one must do to attain wealth. When situations happen in life and they will, you want to make sure that you are financially prepared and not driving yourself into a deeper hole of financial distress. You also want to have the freedom and luxury to not have to constantly work all the time or be at peace if you were to get fired or laid off during a recession because with that savings you have enough set aside to still provide for yourself and your family. Saving when you are financially well off is the best time to save, not when you’re in hot water.
To read more articles on all things finance and wellness click here. I’ve also created a free e-book on “Mastering Your Money Mindset: A 3 Step Guide to Attracting Abundance” that’s available with this link here. You can always find me on my Instagram with the link in my bio and let me know what you think!
