An emergency fund provides a critical financial cushion in case of an unexpected event that requires immediate access to money. These funds are typically held in savings accounts. It can take anywhere from one to five years to save the full amount needed to handle any emergency.
Keeping this money available can prevent a single incident from ruining an entire life. Exactly what amount should be saved varies. There are some basic things to consider when determining how much money to save for emergencies.
Savings for Living Expenses
One of the most common ways to determine the basic amount that should be kept in an emergency fund is to calculate all living expenses for a single month. This includes rent, food and average bill payments. It could also be based on an emergency budget that assumes all unnecessary expenses are stripped away. A basic fund for emergencies should contain enough to cover anywhere from three to six months of living expenses. This provides protection in the event of an injury or job loss.
Savings Based On Income
An alternate way to calculate emergency savings is to look at the total amount of income earned in the household each month. This is best for individuals with a stable income that is not likely to change any time soon. Calculating in this way means the fund should hold three to six months’ worth of pre-tax household income. This is enough to provide a safety blanket if a catastrophe prevents everyone in the household from working. This is a better option than calculating monthly expenses because it allows for the development of an emergency budget as needed.
Account for Personal Assets
The total amount of the fund should contain some extra money to account for important personal assets. This means assets that would need to be replaced right away in order to keep working or living a normal lifestyle. Some examples include a car, a cell phone or even a computer. A good safety blanket is to keep the replacement value of these important assets in the fund at all times.
Emergency Medical Costs
A final consideration should be emergency medical costs. The emergency savings should hold enough to cover the full deductibles for health insurance. It will help to have two to three times this amount available to handle treatments, medications or devices that insurance does not cover. Having extra money in the fund for medical expenses can ensure that serious injuries do not bankrupt the household.