You never know when you suddenly need money. One day you may lose your job, become sick or simply encounter some unanticipated costs. Life is unpredictable and a money buffer (aka an “emergency fund” 🤓) seems like a wise idea.
But how much money should you put into this emergency fund?
c) 3 months of expenses
d) 6 months of expenses
e) 12 months of expenses
f) none of the above?
A Google search tells me that ‘financial experts’ recommend somewhere between 3 to 12 months worth of expenses. Seems like a relatively large range 😳😳😳
And honestly, do you even know how much your monthly expenses are?
(Here’s a quick way to find out. Go to find your last 3 months of expenses in your banking app, add them up and divide by 3. That’ll give you an approximate monthly number.)
Ok, now how many months are we looking at?
Every dollar you put into a 2% p.a. savings account, means one less dollar available for other activities, like paying off debt (saving you whatever interest you would otherwise pay) or investing in the financial market, using the S&P500 🇺🇸 as a proxy, that would mean missing out on an average of 12% p.a.
So then what would the bare bones minimum emergency fund look like?
Well, imagine if you lost your job and you had literally no money coming in.
Using the US as an example, as of late 2018, it takes around 13 weeks to find a job – that’s around 3 months. This will vary based on job, location etc. But let’s just go with this as an average. If that’s the case, then to be on the conservative side, your fund should cover more than 3 months worth of expenses.
Once you get to that point, then it may be an opportune time to reassess and tackle some other financial goals simultaneously, such as, put more money towards paying off outstanding debts, or put more money into investing. But you know, one step at a time 😉
PS. looking for a savings account? 👉 Which savings account is best