What You Need To Know
- Your emotional state can determine how much you put aside as your emergency fund.
- You can split the journey to filling your emergency fund into two.
- Debt can determine how long it will take to fill up your emergency fund.
The amount to keep as your emergency fund depends on various factors. These include your average expenses, how many people earn an income within the household, and even emotional factors like a feeling of security.
Multiple income-earning households should consider how such factors affect each contributor. Aim for a win-win situation. Let's dig deeper into each of these factors.
- Average Expenses
Your average expenses are the foundation of the amount to put aside as emergency funds. Take your average monthly expenditure and multiply it either by three or six months. The total you get is what you should keep aside as your fully funded emergency fund.
You can calculate your average monthly expenditure by using the zero-based budgeting method. Give yourself at least ninety days to adjust to the financial spending plan. Many people take time to make it a practical habit.
Use pen and paper or an app to get your average monthly income. Make your budget before spending the cash. Allocate the whole amount.
You Can Also Read How To Take Control Of Your Money (Zero-Based Budgeting)
- Household Income Generators
Single-income households should handle emergency funds differently from double-income ones. The financial risk profile for such homes differs. While one has a backup in case of loss of income, another doesn't.
Single-income households should aim for at least six months of expenses as their emergency fund. Homes with at least two adults earning an income can reduce the coverage period to three months. Take advantage of essential insurance covers to minimize the possibilities of utilizing your emergency fund.
Some insurance covers to consider are medical and term life. Anyone having dependants should have a term life insurance that covers an amount that, if invested, would give returns that compensate for the loss of income in the event of their death. Medical covers can prevent the depletion of emergency funds when facing health emergencies.
- The Emotional Factor
People react differently to emergency funds of varying levels. Taking care of such emotional aspects can impact your ability to build wealth. Many money decisions are more emotional than factual.
Think through what matters to you at an emotional level financially. Do you feel more secure at a three-month or six-month level of emergency funds? Couples should discuss and agree on a figure that makes sense to them mentally and emotionally.
Most couples consist of a spender and a saver. These translate to different emotional and financial comfort zones. Accounting for such aspects gives a better chance of working out a practical emergency fund amount.
Tips and Tricks
Use your average monthly expenses, not income, to calculate how much you should put aside for emergency funds. The amount should be for the basics like utilities and food. Overestimating the fund may delay your ability to move further along the road of financial stability.
Split the journey of filling up your emergency fund into two steps. Focus first on having a mini emergency fund equivalent to one thousand US Dollars. The exception is if your total emergency fund adds up to less than the upper limit of the mini-emergency fund.
Fill up the mini-emergency fund to a fully funded emergency fund once you have paid off all your non-mortgage debt. You can place the money in a financial vehicle like Money Market Funds that is easy to access but builds interest to shorten the journey to your goal. The fund may work as a shield from your finances spiraling downwards when you face unforeseen circumstances that negatively impact your finances.
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