Great question!! Let’s start by defining “emergency”. A true emergency is unexpected, necessary, and urgent. Rear-ending someone on the highway, cutting yourself while chopping veggies, break a tooth on a fortune cookie (yes, it really happened to me) or suddenly getting laid off are actual emergencies.
Once you become debt free, HAPPY dance, you officially move to Baby Step 3. Such an exciting step because now all those payments you made to credit cards, car payments or student loans are going to your emergency fund. Depending on your total payments made in previous months it’s possible to have this step complete in a short time. A fully funded Emergency Fund should be 3-6 months of your living expenses. Depending on job stability will give you an idea of how much. Personally and professionally I always recommend 6 months. Better safe!
Did you kow, if you have an emergency fund you’re doing better than 78% of Americans that are living paycheck to paycheck? Kudos to you, keep up te great work. For the most part more than 50% are unable to cover a $400 expense without reaching for the credit card.
The question is, how much exactly should you save? Here’s an example with hypothetical numbers but the categories are all your basics (home, transportation, food, utilities) which MUST be covered.
- Mortage / Rent $1100
- Utilities $300
- Cell Phone $100
- Insurance $300
- Groceries $400
- Car Gas / Maint $150
- Annual Bills $200
The total for 1 month in the example is $2500 to cover your basics. Save for 3 months – $7500, 4 months – $10,000 and 6 months – $15,000. Imagine having 6 months saved and life throws a curve ball with job loss, medical diagnosis, auto accident, and yes even a pandemic. I’m not suggesting you don’t be concerned but the weight off your shoulders is “ahhhhhh we got this”.
Schedule a call with me HERE if you want to go through the expenses and determine what you should have for your emergency fund. In the meantime, stay safe everyone and know as your financial coach I’m as close as text, email or call.