Unless you’ve been living under a rock you have probably heard that you need at least a six-month emergency fund just in case something were to happen to interrupt your income stream. That advice, while it certainly seems to make sense, simply doesn’t work for a large amount of consumers.
In fact, the average American does it not have an emergency fund of any kind. According to a survey in 2012 by the National Bureau of Economic Research, approximately 50% of Americans would have an extremely difficult time if they were forced to suddenly need $2000 because of some type of financial crisis.
In some cases this is simply due to a lack of cash but, for many consumers, the simple fact is that this six month rule doesn’t jibe with their personal finance habits and has no real relation to their actual financial reality. In this case what happens is that many people simply feel paralyzed and choose to do nothing, a financial decision that can be quite dangerous.
If you’re in this same situation and looking to get past it, you should start by asking yourself the questions that follow and, if you can, coming up with an answer for all of them.
- Simply put, what’s your idea of a financial emergency? There are quite a few people that have an emergency fund for life’s unpredictable expenses and the occasional major emergency. The question is, how do you define these terms? For example, if someone were to pass away or have a serious illness, what kind of crisis would this mean for you and how much money would you need? Taking these types of examples into account, it might be a good idea to have more than six months’ worth of expenses as your starting point.
- What kind of job do you have? If you consider losing your job a full-blown emergency then you should also consider having at least six months of liquid cash on hand to cover the bills while you’re unemployed. Doing this it means that you’re going to need to pick an amount of money that makes sense to save and also depends on your spending habits, your lifestyle, your industry and your profession. For example, if you’ve been at your same job or in the same industry for over 20 years and lose that job, finding one at the same level of income is going to be rather difficult. If you are self-employed it might mean that you need even more than six months’ worth of money put aside
- What amount of savings makes you feel comfortable? Depending on what you do, who you are and how you feel about money, you may need six months’ worth of cash in an emergency fund or you may need two years’ worth. This is a question only an individual can answer.
- What exactly is preventing you from saving money in an emergency fund? There are many answers to this question but, most often, it’s the way a person is raised or the experiences that they’ve had in their lifetime that keeps them from saving. If it’s necessary to talk to a financial expert or even a mental health expert in order to find out this answer, you should do it.
At the end of the day it’s really a personal decision as to how much money you should have in an emergency fund. You need to take into account what makes you feel comfortable, the profession that you’re in and how long you have been in the industry and quite a few other factors. You also need to take a bit of time to determine whether something in your past, in your childhood or whatever is overtly influencing your financial behavior and decisions.
The fact is, the reason it’s called an emergency fund is because, when an emergency arises, it will be there to make sure that you don’t drive off a financial cliff. If you don’t have an emergency fund and you need some help or advice putting one together, please let us know or drop us a line and we’ll help you as much as we can.