If you’re wondering what the heck’s an emergency fund, it’s around 3-6 months of your necessary living expenses (NLE) placed in a savings account for the unexpected costs in your life. When I say NLE, I mean paying your mortgage or rent to have a roof over your head or making your car payment to get to work on time. A necessary expense isn’t getting a blowout or having cable, because if you’re in a financial emergency, such as losing your job, you will have to cut unnecessary costs. When things get tough financially, being able to watch the Real Housewives isn’t a priority.
There isn’t a cookie-cutter formula for an emergency fund because everyone’s financial situation is different. An excellent guide for how much to set aside in your emergency savings is three months of NLE if you have two sources of income and six months for one source of income. If you’re living off of one income, then you’ll need to save up, at least, six months of your NLE.
Now here is where you need to take a look at your life when planning out how much to put in your emergency fund. If people are getting laid off left and right at your work, then you’re going to need to save up more than six months of NLE. For military families, you need to save up more than six months of NLE, too. Let’s say the non-military spouse is making great money working and then the military spouse gets orders to move across the country. Now you have a car payment you can’t make on one income, and it’s going to take a while to find a job making the same amount you were making. Funding an emergency savings account with the proper amount based on your life situation will help with these pickles.
There’s also a risk tolerance factor to emergency savings. Risk tolerance is basically how protective you are over your money. Are you comfortable with going to Vegas and throwing $300 on black? Then you probably have a high-risk tolerance and can handle the “money heat”. Or, are you like Gollum (my precious) with every penny? If so, you’ve got an extremely low-risk tolerance. For those with a lower risk tolerance, you may want to save a little more—having extra in the bank may make you more comfortable financially.
Haveing an emergency fund is important but don’t freak out if you only have $50 in your savings or none at all. It’s a goal to work towards even if you can only save $10 a month. Don’t over think it, just start saving a little now to begin making it a habit.
Are you a gambler or Gollum when it comes to savings? Tell me below.
Lots of gratitude,