If you’ve been listening to anything I’ve been saying, you already know how important I think an emergency fund is to your family’s finance. Setting up an emergency fund is one of the first steps everyone should take. After all, an emergency fund is the only thing separating you from full-blown panic when life throws those little unexpected blows at you.
If your car’s engine starts smoking, you don’t worry; you can fall back on your emergency fund. If your home’s hot water starts clanging, you know you have the funds to replace it. Whatever unlucky incident preys upon you, you’ve come to rely on your emergency fund to handle.
I was struck with an unsettling thought the other day, though. I wondered if my emergency fund was really enough to depend upon in today’s economy. In years past, I’ve relied on the emergency fund for small bumps in the road of personal finance. But today there are stories everywhere about major financial catastrophes. People are losing jobs and homes. In fact, some families are losing everything.
Thoughts like this must make you think, “Is my emergency enough to help me if I faced a real financial nightmare?” Before now, you may have considered your emergency fund of $1,000 completely adequate. What could possibly happen that you couldn’t fix with that kind of money? Now, however, you see everything in a different light. What would you do if you lost your job and couldn’t immediately find a new one? What would you do if you were in a car accident and couldn’t work for a month or two?
In order to really feel secure in your emergency fund, I suggest trying to achieve a balance as high as three, or even six, months of your living expenses. Add up all of the bills that you have to pay every month: rent, utilities, debt payments, and food. Those are your monthly living expenses. Then, simply multiply your expenses by the number of months’ reserve you’d like to store up. That is your new emergency fund goal.
Of course, you will not build your savings up to this level overnight. Today you may only have one month of expenses in your emergency fund. By choosing to put off making any major purchases, however, you can quickly start padding your savings. You might consider making this your primary financial focus until you reach your new savings goal.
Having a large emergency fund won’t be the answer to all of your financial problems if you lose your job or face a medical emergency. What the large fund will do, though, is give you the cushion you need to build a plan to survive your problems. You will be able to sleep at night knowing you can pay all of your bills while you focus on getting a new job or healing.
