Ideal emergency fund amount
How much money should I have set aside in case of an emergency? What is an emergency? When should I withdraw from this fund? When should I not spend money from the emergency fund? All these questions will be answered in this article.
What is the emergency fund?
The emergency fund is, as the name suggests, an amount of money, set aside in order to be used for an emergency.
What is an emergency?
An emergency is anything unexpected that occurs in our lives and we need an amount of money to help us deal with it. Examples of emergencies:
- physical damage to property (i.e house, car, etc.)
- living expenses after a job loss or pay cut
- unexpected medical expenses
- any other unpleasant situation that may occur of the sudden
When should I use money from the emergency fund?
The answer is very clear. Anytime something unexpected happens and brings us to an unpleasant situation, we can spend money from the emergency fund. On the contrary, we must never spend any money on our expected monthly expenses, or for non-essential expenses. Finally, in case we have any kind of long-term goals, like retiring at 40 or creating a business, we must not get money from the fund.
How much money should I keep in the emergency fund?
I hate what I will say here, but… “it is not a straightforward answer”. The amount of money that we should have put aside depends on our periodic, expected expenses.
As you notice, I don’t claim that the emergency fund depends on our salary. In fact, it doesn’t. Two people with the exact same salary may have totally different needs. This is why I believe that the most important factor is to calculate how much money you spend in a month. Let’s say, you come up with a number X. This means that you spend X dollars per month on average. Then, in my opinion, you should have set aside 3*X dollars.
Having 3*X dollars in a bank, allows you to easily cope with any danger that may occur suddenly. It actually gives you the peace of mind that for 3 months, you are totally fine.
Conclusion
This is a short, but very intuitive article, where I suggest putting aside an amount equal to 3 months’ living expenses. Finally, remember that our goal (and our wish) is that you will never need to withdraw any money from the fund, as this will mean that something bad happened. However, if anything unpleasant does happen, let’s make sure we have enough money to deal with it.
