How Big Should Your Emergency Fund Be?

An emergency fund is the amount of money you keep in a reserve account should you have to cover any unexpected expenses. For example, you may need to cover medical bills, education costs, or the repair of a major appliance.

Determining how big this emergency fund should be depends entirely on how much risk you want to take and your financial means.

The Risk

Opting for a smaller emergency fund enables you to free up more capital for the here and now, but it also presents the problem of not giving you a big enough fund should something go wrong.

As a general rule of thumb, if you have children or other dependents you should opt for a higher emergency fund. A single person can afford to take bigger risks.

The Financial Means

Your financial means will be another factor you have to take into account. The higher your salary the more you can put into your emergency fund, naturally.

However, this isn’t the only point you have to take into account. Your financial means can change quickly. Here are some of the considerations that may influence how much you put back for a rainy day:

  • Are you at risk of redundancy?
  • Will any major changes occur in your life, such as a change of career?
  • Will the amount you spend per month change in any significant way?

The Answer

First, figure out how much you earn every month. Pick out every regular bill, including rent/mortgage, food, electricity, and water. See how much they amount to and compare this amount to your monthly salary.

See what the difference is between the numbers. For example, let’s say you have $1,000 leftover at the end of the month.

With this $1,000, for a single person, you may be able to store as little as $100-$250. Someone who has a wife and two kids may want to think about saving $500-$700 per month.

Anticipation

The best way to deal with an emergency fund is to try to predict emergencies when you can. If you’re worried about the health of the company employing you, a good idea is to temporarily boost how much you store in your fund every month.

Another example is if you’re preparing for a round of annual health checks. Boosting your emergency fund months in advance is a clever idea.

Ultimately, the way to do this is to concentrate on your financial circumstances. Monitor your financial health and tailor your plan according to your needs.