Emergency Fund: How Much Do I Need?

Last Updated: Jan 15, 2023

It is essential to have savings, even if you are unable to save a lot of money every month. Saving what you can, when you can, adds up over time. Ideally, you want to be prepared for the worst-case scenario. What happens if you lose your job, or your finances take a huge plummet due to unforeseen medical costs? You don’t want to be stuck in a position of financial dependence, or have the debt collector come knocking on your door. That’s why you need to keep an emergency fund.

What Is An Emergency Fund?

An emergency fund is a safety net in the form of cash, or liquid assets such as marketable securities, or short-term bonds that can easily be converted to cash.

Why Do I Need One?

You may think that your career is stable, and you have enough savings or cash to manage if things get tough, but life is unpredictable.

You need an emergency fund to prepare for unforeseen situations such as:

  • An emergency operation
  • Job loss
  • Unexpected travel e.g., to visit a sick relative
  • An unplanned pregnancy
  • Paying off debt that you have neglected for long
  • Car repairs
  • Unexpected legal fees
  • Non-payment from customers, leading to loss of income
  • Identity theft, or account hacking

How Much Is Enough?

The more money you have set aside for emergencies, the better. Of course, it isn’t always possible to save the same amount every month.

You can calculate how much you personally need to sustain yourself, and your dependents by looking at certain factors such as your income, how long it will take you to rectify the situation/ stabilize your finances, and if you have other savings that you can use.

Is There An Average Amount?

It is recommended that you keep enough money in your emergency fund to sustain you, and/or your family for at least three months. Ideally, six months.

How Can I Calculate The Amount I Should Set Aside?

Look at the following factors:

  • Your gross monthly income
  • Your monthly expenses (the most important e.g., rent, food, utilities, and transport)
  • Your liquid savings (excluding retirement funds)
  • How long it could take to find a new job, and if the new job will provide the same income, or enough to support you, and your dependants
  • If you only need to add to your savings, or build an emergency fund from scratch

The Bottom Line

Ideally, you don’t want to deplete other savings if an emergency strikes. You need to keep a separate emergency fund which can sustain you, and your dependents for an adequate amount of time if you are faced with unemployment.

If you need to pay medical/ or other large expenses that your insurance doesn’t cover, you need an emergency fund with enough money to cover that expense. Preferably, your emergency fund should contain more than just enough to cover the expense, so that you have enough should another expense suddenly appear.

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