Dear Cath - January 2018
Q. How do you work out how much you would need in a emergency fund? Annette Baker
A. You need to know exactly what your financial needs are. For example, we have 12 months of living expenses in our Emergency Fund. Right now we are basically empty nesters - our children are grown-up and self-supporting, and we don’t carry any debt. But having been in the position of not having an income for over three years, when we had a mortgage and three small children, and now having a variable income, it gives me peace of mind to know that no matter what happens, we can continue to live at our current lifestyle for at least twelve months if necessary.
To help you decide how much you need in an emergency fund answer these questions:
I always recommend at least six months of living expenses in an emergency fund, but other financial gurus suggest different amounts. Dave Ramsey suggests aiming for a starter emergency fund of $1,000, then building it up to three months of living expenses.
Having been through a very long period of unemployment, I can tell you that three months of living expenses, even if you stretch them till they scream, won't last longer than seven - eight months max. If you believe you'll sleep better with a $1,000 in an emergency fund, then that is the amount for you. If you like the idea of long-term security and self-sufficiency, aim for six to twelve months or longer.
Just remember, it takes time to build and emergency fund, it won't happen overnight. Slow and steady, throwing any extra cash at it when you can, will see it build up faster than you think possible.
A. You need to know exactly what your financial needs are. For example, we have 12 months of living expenses in our Emergency Fund. Right now we are basically empty nesters - our children are grown-up and self-supporting, and we don’t carry any debt. But having been in the position of not having an income for over three years, when we had a mortgage and three small children, and now having a variable income, it gives me peace of mind to know that no matter what happens, we can continue to live at our current lifestyle for at least twelve months if necessary.
To help you decide how much you need in an emergency fund answer these questions:
- do you have a mortgage?
- credit card debt?
- other debt?
- a chronic illness?
- job security?
- do you have a regular or variable income?
- are you married or single?
- do you live in a single or dual income household?
- do you have children to feed/clothe/house/educate/support?
- do you pay child support?
I always recommend at least six months of living expenses in an emergency fund, but other financial gurus suggest different amounts. Dave Ramsey suggests aiming for a starter emergency fund of $1,000, then building it up to three months of living expenses.
Having been through a very long period of unemployment, I can tell you that three months of living expenses, even if you stretch them till they scream, won't last longer than seven - eight months max. If you believe you'll sleep better with a $1,000 in an emergency fund, then that is the amount for you. If you like the idea of long-term security and self-sufficiency, aim for six to twelve months or longer.
Just remember, it takes time to build and emergency fund, it won't happen overnight. Slow and steady, throwing any extra cash at it when you can, will see it build up faster than you think possible.