Calculating Your Emergency Fund
Calculating your emergency fund isn't difficult, but it takes careful planning. First, evaluate your income to determine how much money to save for the unexpected. If you've already created a budget, you know how much money you usually bring home in a month. Multiply that amount by three to determine the amount you'll need to get by for three months without pay. If you don't have a budget, you should write down every dollar you get for the next eight weeks, and divide that amount by two. This will give you a good estimate of how much money you make each month. You'll soon have your budget and feel much better about your finances.
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U.S. Senator Kent Conrad makes remarks concerning the economic stimulus and the extension of unemployment benefits. An emergency fund can help you get by when you've lost your job and unemployment checks aren't enough.
Next, calculate average emergency costs. You know how much you normally spend, but in an emergency, you'll probably have additional expenses. If you're out of work because of an accident, you'll probably have some medical expenses to pay, on top of everyday living expenses. Allow enough money to pay the medical bills that your health insurance won't cover. See your insurance plan's Summary Plan Description for a good idea of the costs you'll be responsible for in the event of various medical emergencies. Or, if something happens to your home, you need to be prepared to pay your bills while you're making other arrangements. Your homeowner's insurance should cover the costs of replacing your home and valuables.
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An emergency can break your bank, so planning ahead will relieve some of the stress.
It's also important to know your cost of living. Living on your budget now can be tough. Living through a time of crisis will probably be tougher. Allow for the cost of living during such a time, knowing that your expenses will be greater than they are now. Your emergency fund should contain enough money to let you live through a disaster until your life returns to normal. You probably won't live at the same standard you enjoy now, but you can pay your mortgage and keep your car until you get a new job or recover from a sickness. The overall goal is to have survival cash, not fun money.
How can you be sure two to three months of income is enough for an emergency fund? If you expect high medical bills, or if your job isn't secure, you may want to save more. Six months' worth of expenses should be more than adequate, if it makes you feel more comfortable. Just be sure that you can afford to put aside that much money. Put it in an interest-bearing account so that you can still bring in some income from your emergency fund.
Of course, there is always the question of where to keep the money. On the next page, we'll explore the best ways to start your emergency fund, where to keep it and how to get the money for it.
