How much should I save as Emergency Fund?
Today I’ll discuss on Emergency Fund; a very essential but much neglected thing in our daily family life. When,everything goes right, we can’t understand the importance of emergency fund and so we generally give no importance to this factor at all. But ask me, this is very important to have a secure family life. In this world, everything can change within a minute. Any natural disaster, like-earthquake or tsunami, any accident, or any bad incidence may change your whole life within a minute. God forbid! It should not happen. You cannot prevent all of this but being prepared for any bad incident is always good.
This is the reason; we require enough insurance to cover up all the accidental loss. But what about day to day expenses if we lose our regular income field? Here, comes the necessity of emergency fund. Emergency fund will give you a back up of your daily needs while you have no income or have very less income for surviving.
What is Emergency Fund?
An emergency fund is a fund which is meant to save for an emergency, such as loss of job, any major illness (which is not possible to cover fully under health insurance), or a major sudden expenses.
There are two attributes of a good emergency fund, one is liquidity and another is safety. Emergency fund should be kept or invested in such a way that at least 50% of the emergency fund is easily convertible into cash within few hours.
Which factors determine the amount of emergency Fund?
Emergency fund varies from family to family. It depends on the no of family members, type of income path, no of kids and many other factors.
Let me explain with an example, suppose, Mr. A and Mr. B both works in an office in same level and get same amount of salary in hand. They both have 4 family members; two kids and wife. The only difference is Mr. A is the only bread earner of the family while Mr. B and his wife both are earning members of their family. In this case, Mr. A will need more emergency fund than Mr. B. because in case of any unexpected event, Mr. B will get financial support from his wife which Mr.A will not get.
Normally, any family needs to maintain 3months to 12 months’ living expenses amount as Emergency Fund. Here, living expenses indicate the expenses which are critical and basic necessities of any family, like:-
• food expenses,
• health care,
• normal transportation expenses,
• personal expenses,
• Debt payment (if any).
This fund should not include any expenses which are not critical for living, such as:-
• Entertainment expenses
• Dining out
• Nonessential shopping,
• Savings for other financial goals
Just now, I mentioned that any family needs to maintain 3 months to 12 months’ living expenses as emergency fund. But what is exact amount for you? 3 months? 6 months? Or 12 months?
I’ve designed a very simple and interesting quiz session to determine this. Participate in this quiz and find out how much emergency fund does you need? While designing this quiz, I’ve assumed that you regularly invest for your future and other major and minor financial goals.
Q1.What is your primary income source?
1. Job+ other small part time income sources
Q2. Do you get fixed monthly income or your income varies?
1. Fixed income
3. Totally Variable
Q3. How difficult it to be for you to replace your existing income source?
Q4.How many older family members (above 55 years) belong to your family?
3. Equal or above 2
Q5.How many kids (less than 10 years) belong to your family?
3. Equal or above 2
Q6.Do you have any particular loan and debt where you need to pay a fixed EMI? How many months you need to cover the whole loan?
1. 0 months
2. Less than 6 months
3. More than 6 months
Q7.How many family members earn enough to support at least half of the total monthly expenses in your family?
1. More than 2
Q8. How many of your family members are covered under enough health insurance coverage?
1. All family members
2. 50% of family members
Less than 13 Points:
Currently your family has good financial security. You need to maintain only 3 months’ living expenses as emergency fund.
13- 16 Points:
Currently your family is in good condition but your family may be in problem under any bad event such as loss of job, or any. So, you need to maintain at least 6 months’ living expenses as emergency fund to get enough time to fight with the bad situation.
Your current condition is average. You may need to revise your budget once more and may require cutting unwanted expenses and saving more. Your family needs to 9 months’ living expenses as emergency fund.
You need to check your financial condition. You should search for an extra income path or may encourage your spouse/other family members to work on his/her leisure time. Under the current situation, you need to maintain 12 months’ living expenses as emergency fund.
This emergency fund is just like an insurance policy. You should not meet any extra expenses from this fund under normal circumstances. Once you have it, guard it carefully.
From the above analysis, if your family needs to maintain higher amount of emergency funds then don’t be disappoint or don’t make panic. Just be relaxed and cut down less important small expenses and put the money in a good liquid fund or savings account.
You can build a good emergency fund in a period of 2-3 years just by saving extra amount of $50-$100 per week or may be less than that. A little change can make a big thing. Revise your budget and calculate your emergency fund today.