The events of last year wiped out our emergency fund. We started the year with a decent amount of money in our savings account, but then we had to use most of it to pay for our basic needs throughout the year.
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I will be forever grateful that we had the sense to save money each month when we were able to. Our emergency fund saved us from having to use our credit card for basic needs. It also kept us from asking for help from family and, as a last resort, the government.
But now it’s almost depleted, and I mentioned a few months ago that we were going to start putting money back into it when we can.
The amount we had saved in it was really only enough to cover about 3 months’ expenses, which we were able to stretch with the help of a small amount of income from my husband’s business. But this time I want to save at least six months’ expenses, if not more.
How Much Should You Put in Your Emergency Fund?
Everyone’s situation is different. It’s called “personal” finance for a reason. If you’re single, have a great job, and have relatively few expenses, you may not need as much in your emergency fund as someone who has six kids, a large mortgage, and runs their own business. You really need to be the judge about how much money you should be saving in your emergency fund.
The least amount you should aim for when building up money in your emergency fund is $1,000. That’s truly the bare minimum. And it likely won’t get you very far if you ever need to use it. Depending on where you live, that may not even be enough to cover your housing expenses.
I recommend making it a goal to save at least 3 months’ expenses and keep building from there. If you save six months to 1 year of expenses, then you should be okay if you ever have a job loss or a medical emergency.
How Do You Determine a Month of Expenses?
Don’t know how much money you spend each month? You need to find out. Start tracking your expenses and use that information to help you determine how much money you might need to spend during just one month in a true emergency.
If you were to lose your job tomorrow, what are the absolute essential expenses that you would still have to pay during the next month? I’m talking about your basic needs, not fancy dinners out and new clothes every weekend. For us, this is actually a relatively low number, and a good thing too or our emergency fund would have been wiped out sooner.
You should only use your emergency fund for your basic needs, because if you are in a dire situation where you don’t have money coming in, you need all the money you can get to pay for just the basics. If you try and spend more than that, you’ll get into more trouble than you can imagine, especially if things don’t go according to plan. Hopefully you’ll be able to find a job in a month or two, but that isn’t always the case.
Listing your basic expenses can help you figure out how much money you need during a one month period. Your basic expenses will likely come down to your rent/mortgage, food, insurance, gas, car repairs, clothes (only if you need them), utilities, medical expenses, and minimum debt payments.
If you have a budget, just look at the amounts you normally spend in these categories each month, and put the highest amount you spend in a certain category. For example, if your utilities were $324 for October, $375 for November, and $418 for December, list $418 as the amount you need for utilities each month. It’s just better to have more than enough money so you aren’t stressing out about paying the bills during an emergency.
Remember that if you are using your emergency fund because of a job loss, you won’t have to spend as much in transportation costs (if you work away from home), but you may have to pay more for health insurance.
After you go through all your basic expenses and list the high amounts next to each one, add them up and find out the total. I would recommend rounding up to the nearest hundred or thousand dollar. If your amount comes to $2,188, round up to $2,200 or even $2,500 if you want to be extra safe.
Then take the number you got for one month of expenses and multiply it by 3 for 3 months’ expenses (which would be $7,500 from our example) or by 6 for 6 months’ expenses (which would be $15,000 from our example). The amount of money you need to save may shock you, but it’s important to have that money in the worst case scenario.
Where Do You Save the Money?
Up until last year, we’ve always just used our basic savings account at our local credit union for keeping the money in our emergency fund safe. Toward the end of last year, I decided to start using an online bank instead to keep the money out of sight.
I would recommend keeping your emergency fund money in a savings account, just so it’s separate from your day-to-day money for bills and other expenses. It’s also important to keep it somewhere that you can access it quickly if needed.
Our emergency fund was absolutely necessary last year as we entered the first year of my husband’s business. While we didn’t have to completely rely on it the entire year, it did make it possible for us to continue paying for our house and putting food on the table. I highly encourage everyone to have an emergency fund of at least 3 months’ expenses. Don’t put it off until tomorrow. It may be too late.