How much do you need in an emergency fund?
This is a common question that everyone from Millennials to Baby Boomers are asking themselves. A lack of an emergency fund (and knowledge of an emergency fund) is not exclusive to young Millennials.
Unfortunately a number of people don’t have much savings. CNBC released a report that 66 million Americans have zero dollars saved in a “rainy day” fund. Which generation is doing the worst? It must be Millennials since they are naturally the youngest demographic, right? Nope. One-third of Generation X’ers have $0 saved in an emergency fund.
Now that its more clear that two-thirds of the country don’t have an emergency and anyone reading this article now knows they are not alone. Must people don’t have an emergency fund when they should. And they know they should. Its a process though. You don’t build a fully funded rainy day fund overnight.
Emergency Fund = 3-6 Months Living Expenses
This brings us back to how much do you need in an emergency fund? Most financial experts advise to have 3-6 months worth of living expenses stashed away. In the event of a job loss, this money is here to help you and your family manage.
What classifies as a “living expense”?
- Utilities (heat and water)
- Heath insurance
What should NOT be factored in?
This one is a bit easier. Essentially, if you lost your job, these are the “want” items in your budget that can easily be cut. They are not your day-to-day living expenses required to feed and care for your family.
- Dining out
- Goal savings
Obviously the 3-6 months worth of expenses is merely a guideline. Everyone’s situation is different. I personally base it on job security. If you and your spouse have extremely stable jobs, I feel you are safe to go with 3-4 months worth. If your job(s) are a bit more unstable in pay, e.g. your paychecks can be inconsistent and you are not salaried, then it would be in your best interest to strive for 5-6 months worth of living expenses in your emergency fund.
At the end of the day you simply have to begin saving to hit these goals. It may take you a year, or three years to hit this number. But you have to start somewhere. I have a fully funded emergency fund and it is unbelievable how much financial peace of mind it brings along with it. I promise you that.