FINANCIAL THOUGHTS
What Is The Right Amount Of Emergency Fund?
Having an emergency fund is mandatory. No matter who you are, an emergency fund will come in handy when you are in a tight financial situation. Without a doubt, it will help you in a financial difficulty and helps you recover from that unfortunate event.
But then again, the word is used so loosely till a point that the measurement of the emergency fund is quite unclear. You could be piling up money in your bank account just so that you know can accumulate that emergency fund. The question is, how much is that emergency fund?
The use of an emergency fund
First of all, an emergency fund should be used when your income and asset is not enough to pay off your expenses and debts. Basically, your inflow stops but your outflow continues.
Normally that will happen when you are not able to work and earn an income. And there are 2 main reasons why you are not able to work.
First is due to the internal factor. If you fall sick or became temporary disable, you may need an emergency fund. The second is when due to an external factor. It is when you get retrenched.
If it were due to a major illness or disability, it would be wise for you to get insurance for that reason. As insurance is indeed useful in such situations, this definitely one way to be prepared when you are not able to work no longer. Furthermore, it is a more financially intelligent choice, as the payout that you will get may be higher than the total premiums that you are paying for.
Unfortunately, in the case of retrenchment, there is not a financial instrument that will help you in such situation. Therefore, an emergency fund will be used in this second situation.
How much do I need?
Now the question of how much of an emergency fund you would need. It will definitely differ between individuals hence this is just a general benchmark of how much you would need.
You can start by calculating your monthly expenses. But if your monthly expenses were already 60% of your salary, it would be advisable to just use the figure of your monthly salary.
Normally everyone would use up a large chunk of his or her salary. Never came across anyone that said that they do not need 20% of their salary. In other words, most of us do need all of our own salaries.
Moving forward, your monthly salary should last you for 3 to 6 months after your retrenchment. To pinpoint the duration, you can perhaps see how hard or easy for you to get another job in your industry.
That being so, after knowing the duration you need, multiply with your monthly salary. Eventually, that will be the amount of your emergency fund. If you feel that is enough, do increase the amount to your suitability. Keep in mind having more is way better than having less. Well, that does apply in this situation only.
An emergency fund is sometimes not only for personal use. Your family might need money as well. In a situation, your family member might need to for a surgery and fortunately, you have the money to pay for it.
How to use the emergency funds?
In any event, you really have to use your emergency fund, it is suggested that you pay off your fixed expense first. Namely household bills and expenses, insurance premiums and mortgage loans.
Variable expenses such as transportation, clothing, and apparel may be put into second priority. As those expenses, you may alter the amount. The reason for this method is due to the fact if your period of unemployment may be longer than what you have expected.
Consequently, do determine what are your fixed and variable expenses. Basically, what are priority needs, needs and wants? This is one way that you may want to categorize them.
Start and assure yourself
Like mentioned above, everyones’ emergency fund is different due to the fact that everyone has a different amount of salary and expenses. That is why you should always take time and reflect on your personal expenses.
For those who have yet to start, do not procrastinate. Start and you will get the ball rolling. The amount might be huge but if you consistently put that money in, you will eventually hit that target.
Well, that’s the end of this article. Do share it if you think this is beneficial to your friends and family.
Disclaimer:
I am a financial adviser but I am not your financial adviser. Therefore, what is posted on this website, are my opinions and NOT to be taken as financial advice. Information provided might be relevant at this period of time but may be irrelevant due to alterations to rules, regulations or policies. The information provided is true to the best of my knowledge, but there maybe omissions, errors or mistakes.
