Five Questions You Should Ask When Building an Emergency Fund
There are some aspects of personal finance that are dead sexy. Like investing – it’s pretty darn exciting to put a little bit of money into the stock market or a mutual fund and watch it grow into a lot of money. Or buying a house – the thrill of going from renter to homeowner makes many people downright giddy.
Then there are other pieces of the personal finance equation that are decidedly unsexy. Paying off debt is a good example; it’s a long, hard slog that requires patience and discipline. And then there’s my least favorite personal finance task: building an emergency fund. I can’t exactly explain why, I just find piling up the cash – you know, cash that just sits there in the bank – mind-numbingly boring. But boring or not, an emergency fund is a necessity. This begs the question: how big should my emergency fund be? Or, if you’re like me, what’s the minimum cash reserve I need to build up before I can move on to the fun stuff?
The usual answer to this question is three to six months of living expenses.
I don’t know about you, but that seems like an awfully vague figure to me. It’s a difference of thousands of dollars after all. Also, everyone’s circumstances are different. So to figure out how big of an emergency fund you need, ask yourself the following questions:
Do I own a home?
If so, how old are its major structures (like the plumbing, roof, etc.) and appliances?Homeowners should definitely lean more towards the six month end of the emergency fund spectrum. If your home is older or has aging appliances, piling a few thousand dollars into your emergency fund beyond the six months of expenses is wise.
How old is my car?
As cars age, they require more frequent repairs. Even if the individual repairs aren’t very expensive, they can seriously add up over time. If you’re driving an older vehicle, six months of living expenses in the bank is most appropriate.
Is my job stable?
This is probably the biggest factor in determining how big your emergency fund should be. Freelancers, the self-employed, and seasonal and contract workers definitely need at least six months of living expenses in the bank to cover slow work months or bouts of unemployment. If you work in a more stable 9-5 environment or in a high-demand industry where it will be easy to find a new job in the event of a layoff, three months of expenses might be enough.
Am I well-insured?
In particular, evaluate how good your health insurance is. The number one reason that people in the U.S. declare bankruptcy is a major medical crisis that wasn’t covered by insurance. Do some research about how much coverage your plan offers; if it seems to leave a lot of costs up to the patient, you may want to aim to save up six months of expenses in case you face a medical emergency.
How big is my family?
More people living under your roof means more potential for unexpected expenses. On the other hand, if you’re single and have a steady job, three months of living expenses in the bank is probably enough.
These questions are just a jumping off point in terms of determining how big your emergency fund should be. The important thing is to evaluate your life and expenses and pick a number that makes you feel comfortable. Remember, your emergency fund is there to catch you when you fall – make sure you build a big enough net!
This article was taken from another site (see link below) and posted on this blog by Andre Rosa for educational purposes.