Calculating an Emergency Savings Fund
“How much should I have saved for emergencies?” If you’re asking this question, you’re not alone and especially in light of recent events, the answer is becoming increasingly necessary to know. Even though it seems like a simple answer, it’s not quite that straight forward. In this brief post, we will start with a standard and then address some factors that may impact how much is appropriate. It’s important to know that as with every recommendation we provide as financial planners, it does depend on your specific situation but this is a starting point.
A place to start when deciding how much you should set aside for an emergency savings account is to look at your expenditures each month. Notate the expenses that are absolutely necessary, also called non-discretionary expenses. These should include things like mortgage/rent, utilities, student loans, insurance, car loans, groceries. Once you’ve identified these expenses for one month, multiply that number by 3 and then multiple the number 6. This will be your starting range for a standard emergency savings.
Student Loans: $250
Car/Renters Insurance: $50
3x = $5,100
6x = $10,200
For this example, the range you should start with is $5,100 - $10,200 and when deciding where to save, ensure it’s in a location that is liquid, meaning in a location that you can pull these funds for in an emergency; hence the name. Usually a savings account at your current bank is the most ideal solution. In past days of higher interest rates, it made sense to shop around for the best interest rate and while that is still something to consider, most banks these days have comparable interest rates. Additionally, banks are differentiating themselves with varying services so interest rate may not be the only thing to consider anyway; just make sure it’s liquid and fits your needs for an emergency savings account.
What Items Could Impact the Emergency Fund?
After calculating 3-6 months’ worth of non-discretionary expenses, it makes sense to consider a few factors that may require additional savings on top of the 3-6 months. Some of those factors could be:
· Are you in a seasonal/cyclical role?
· Are you self-employed?
· Are you planning to start a business and/or support yourself for a longer period of time than 3-6 mos.?
· How stable your job and/or your spouse’s job is?
· Personal risk comfort (i.e. if you can’t sleep at night with 3-6 mos. and want a little more)
· If you lose your job, would you have access to healthcare through your spouse or some other source? You may need to consider additional costs for COBRA and/or marketplace healthcare.
· Will your expenses be changing in the near future?
How to Get Started?
Now that you hopefully have a sense of how to calculate an emergency savings, how do you get started? If you already have the amount you need in cash, great! You’ve done a good job of setting aside cash. Usually it makes sense to specify the specific amount dedicated to emergency savings and have it in a total separate savings account. It helps most people easily recognize the amount needed and if it gets used, they can adjust and add more in.
Don’t have enough or even anything saved? That’s okay—now is the time to create a plan to start building toward this. It would be a good time to look at your income vs. expenses and try to take any additional dollars to invest into this account. Even if it’s just $20 a month, every little bit counts. Make sure you set up the contribution to your savings automatically so you don’t even have to think about it. Additionally, if your bank allows nicknames on your account, you should call your savings account the range/amount you want to keep the account between, so using our previous example, if you feel comfortable with $10,000 in the account, then you could name it “10k.”
A Final Word
As previously mentioned, there is no right amount that we can tell you to have in your emergency savings. We can just say that it is of the utmost importance to work towards having this account set up and that you need to think about all the factors we have listed above. Happy saving!
Maddi Napier, CFP®, MBA, FSRI, QKA is the author of this post and is the founder and financial planner of Minerva Wealth Planning, a fee only financial planning firm based in Columbus, Ohio. For questions or comments, email email@example.com