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Why and How Much Should You Save for Emergencies?

Saving for Emergencies

Do you put aside money for emergencies? Are you prepared for a rainy day? How would you meet your expenses if you were laid off from work or between jobs for 6 months or more? These are some of the questions I ask expats who approach me for personal financial planning. Some save money regularly, the majority don't, and the reason for this is that they don't have a specific number to work towards for their 'Emergency Savings' goal.

6-month Emergency Fund
6-month Emergency Fund

Why and how much should you save for emergencies?

Do you own a home?

If you own a home, especially on mortgage, there is a good chance that at least 15-30% of your income is going towards mortgage payments and maintenance of the home. Losing a job or being involved in an accident can cause a sudden dip in your family income and bank balance. In this case, your emergency fund should at least add up to 7-8 months of monthly expenses.

How old are your cars?

Old cars cost more to maintain and can breakdown suddenly with higher maintenance bills. Moreover, they will mostly be written off in case of major accidents as their insured value will be next to nothing. Replacing your car at this stage will make quite a dent in your bank balance. 6 months of expenses is a wise choice to put aside in this case.

Is your job stable?

This is probably the biggest factor in determining the size of your emergency fund. Freelancers, self-employed, and seasonal and contract workers definitely need to put aside at least six months of living expenses in the bank to cover slow business months or periods of unemployment. If you work in a more stable 9-5 environment or in a high-demand industry where it will be easy to find a new job in the event of a layoff, three months of expenses might be enough.

Are you well-insured?

Critical illnesses like heart attacks, cancer, multiple sclerosis, renal failures, etc., can strike as you get older. If you don't have health insurance or at critical illness insurance, how would you take care of treatment costs and hospitalization expenses? If you cannot work because of this illness how would you cover your monthly expenses?  You may want to save up to six months of expenses at the least to cover this scenario and then still get yourself 'Critical illness insurance' for the major expenses.

How big is your family?

More people living under your roof means more potential for unexpected expenses. Six months of expenses should cover these expenses. On the other hand, if you’re single and have a steady job, three months of living expenses in the bank is probably enough.

These questions are a starting point in terms of determining how big your emergency fund should be. The important thing is to evaluate your life and expenses and pick a number that makes you feel comfortable. Remember, your emergency fund is there to catch you when you fall – make sure you build a big enough net!

Start saving and don't touch your 6 month emergency fund unless absolutely required.

What are your thoughts on this topic and article? Please feel free to comment below.

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