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When I first approached calculating how much I needed in an emergency fund, I looked at my monthly committed expenses including groceries, subtracted out the “working” expenses that I wouldn’t incur (like commuting expenses) and then multiplied that figure by 6 months.
Is that right? I don’t think so anymore. I’ve read several things including the following:
Save 3-6 months of living expenses
Save 3-6 months of gross salary
Save 3-6 months of take home pay
Financial Train Wreck has a $12,000 emergency fund goal. Today he explained how he got to that figure after being prompted by a question from Mapgirl who has a $4,000 savings goal.
It is a really good post and informative as well. One major thing that I overlooked in my calculation was the cost of insurance and a cushion allowance for unexpected expenses and also expenses related to finding new employment. Needless to say...I have to go back to the drawing board.
So… How do you calculate the ideal amount of your emergency reserve?
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4 comments:
I had no real mathematical formula to derive at my $10,000 goal. 6 months expenses, gross or net is a good baseline but it's not cookie cutter for everyone. I think it's important for each individual to think about what they consider an "emergency." After you decide what exactly you are saving for, then it'll be easy to figure out how much you need.
I consider an emergency a job loss or major illness that will cause me to go on unpaid leave. If this happened, I thought about the bills that "must" be paid (i.e. food, mortgage, util, car payment, ins. etc) and the bills/expenses that would be added (more food, higher util cuz I'm home all day), removed (cable, cell, etc.) or trimmed (landline service, internet, shopping, going out, etc.). The liklihood of me losing my job is very slim due to where I work but no one can predict a major illness or accident. After all of that thinking, I just picked a nice round number that could tide us over in the interim...just in case. And $10k emerged. LOL
Thanks Single Ma. I also did not consider an increase in the cost of utilities. This will also go into my calculation which I will post soon. =)
Right now, all I would need to cover expenses for 1 year would be about $13,000. To figure that out I calculated -all- my expenses per month and multiplied that by 12 months. It's emergency money in case I don't have a job...my car breaks down...etc.
Use whatever "formula" sounds most realistic for you.
Try this link. It's the Kiplinger's tool I mentioned in my original comment to Financial Train Wreck.
It might tickle your brain into thinking about what else to include in your living expenses and other contingencies. If you don't have insurance, think about getting some catastrophic coverage. If you're young and healthy, you may only need health insurance for an emergency room visit if you have an accident.
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