Do you want to build an emergency fund but aren’t sure where to start? Or maybe you’ve already begun to save but don’t have a consistent strategy. This guide will help simplify the path to financial preparedness by helping you determine how much you need in your emergency fund.
What’s an Emergency Fund Used For?
An emergency fund is a dedicated savings account that’s specifically designed to support you during times of unanticipated financial strain, like job loss. This means it should be kept completely separate from other long-term savings goals, like those meant for college tuition, a new car, vacation, or retirement, and should be left untouched until a genuine emergency arises.
How Much Should You Have in Emergency Savings?
Saving for an emergency fund is all about meticulous planning and methodical saving. You can use the following steps to determine an ideal goal and begin saving in a way that works for you.
1. Look At Your Monthly Expenses
Your monthly expenses are the first and most important place to look when determining how much you need in your emergency fund. After all, the point of an emergency fund is to make sure you can cover at least these expenses. Start by considering essential living expenses such as:
- Rent or mortgage payments
- Ongoing credit card debt
- Utilities
- Personal and family expenses
- Insurance
- Transportation
You shouldn’t include nonessential expenses or things you would cut from your budget if you were facing an emergency, like:
- Entertainment
- Nonessential shopping
- Vacations
- Dining out
2. Calculate the Ideal Amount
Now that you have a clear picture of your monthly expenses, you can calculate the ideal amount for your emergency fund. Most financial experts suggest saving three to six months’ worth of expenses. Once you calculate this amount, you can break it down into monthly contributions.
3. Adjust As You See Fit
While three to six months’ worth of expenses is a good benchmark, the amount you need to feel financially secure may be different.
Life is full of unexpected expenses- like non-routine car repairs and medical bills. If you’re able to, it’s a good idea to expand your savings as much as possible in case more essential costs like these arise.
What if I’m on a Tight Budget?
Creating a strong emergency fund can be a challenging task, especially if you have a limited budget. If saving the suggested amount of three to six months’ worth of expenses seems too difficult, don’t worry, and don’t let that stop you from saving. Instead, start small. Even small contributions can add up over time, and you can always increase them as your financial situation improves.
It’s also wise to keep your emergency fund separate from your everyday checking account to avoid the temptation of putting money back into your regular spending pool. This practice is essential regardless of your budget, but it can be especially beneficial for those with tighter constraints.
Start Planning for Your Future Today!
Whether your goal is to save money for an emergency or retirement fund, begin tax planning, or fine-tune your investment management strategies, Royal Oak Financial Group is here to assist you. Located in Columbus, OH, our team of experts has over 20 years of experience delivering quality customer service and financial planning solutions. Contact us today to learn more!
