Learning how to save money is one of the most important lessons that you have to go through. This is one of the ways that you can protect yourself from the unexpected circumstances in the future. Your savings will help you finance any emergency situation without jeopardizing the expenses that you are currently making.
Your emergency fund is an important saving goal that will protect you from debt. People who do not have this fund usually spend for the unexpected expense by either compromising their budget or borrowing money. In most cases, people choose the latter by using their credit card.
If you want to protect yourself from debt, you should seriously consider building up your emergency fund. But even as you are convinced that you need this fund, an important question to ask is, how much should you put aside for this saving goal?
5 questions to help determine your target reserve fund
It is true what they say, saving can save your life when emergency strikes. But you need to save up the right amount in your emergency fund to keep you from falling short. You can overestimate the amount but having insufficient finances when you need it the most can prove to be disastrous. Despite your best efforts, you could still end up in debt if you fail to save enough funds.
To help keep this from happening, here are 5 questions that you need to ask yourself.
What is the condition of my home?
One of the biggest expense that we spend for involves our home. If you rent your place, all you really have to worry about is your lease. But if you own your home, things could get a bit more complicated and oftentimes more expensive. If you still owe on your mortgage, you want to make sure that an emergency crisis will not compromise this payment because you can end up losing your home. Not only that, you need to consider the repair and maintenance costs of the appliances, furniture and fixtures in your house. The same is true for the structure of your home. The older it is, the more money you have to prepare to spend for its upkeep.
What is the state of my car?
Another culprit that eats away at our emergency fund is our vehicles. Changing tires, oil, busted transmission – all of these have to be attended to. Not only do you have to pay for the parts, the labor is also quite costly. You do not want to tinker in your car yourself because your inexperience can put you in danger while you drive. Leave it to the professionals and just save up for it.
How stable is my job?
A freelancer’s emergency fund differs from someone who is employed by a big corporation. There is consistency in the salary of a person who is employed. A freelancer, on the other hand, relies on project based compensation. If you have an irregular salary, you should aim for a bigger emergency fund to help tide you over the lean months when you have no clients.
Do I have insurance?
Your insurance is one of the ways you can also prepare for an emergency. However, the insurance is usually for a specific purpose only like your health, car, home, etc. If you have most of the possible emergencies covered by insurance, you can target a smaller amount on your emergency fund. After all, these insurances sometimes need monthly payments too.
How many are relying on me?
If you are alone, your emergency fund can be relatively small since you only have to think about your expenses. But if you have a family, you need to consider the number of people that will be relying on your reserve fund. This includes your spouse, children and even your parents. This is a very important consideration when you are trying to figure out how much to put aside for unexpected situations.
Steps when calculating your savings amount goal
When you have answered the 5 questions mentioned above, your next step is to do the computations. Here are the steps that you need to follow.
Create a budget plan. A budget plan will identify the various costs that you are spending your net income on. If you do not have this yet, spend a month or two in listing down the expenses that you usually make. Do not forget to factor in any expense that you make once a year or even quarterly.
Look at your monthly expenses. Scrutinize the expenses that you make – both wants and needs. Total this amount and multiply it by 8 months. That is the amount that you need to save up for to live comfortably for 8 months in case your job is compromised.
Determine the emergency costs. These include the repairs and maintenance costs that you need to expect. You may want to estimate for medical funds – at least those that are not covered by your health insurance.
Factor in the rising cost of living. Although your emergency fund is calculated for the next 8 months, the rising cost of living could shorten that. When the time comes, your fund may only be able to finance 6 months of your needs.
All in all, you have to add your monthly expenses, multiply it by 8 months and add the emergency cost that you have estimated. Put a little buffer for the inflation rate and you should be able to arrive at your target emergency fund.
You don’t really need a financial planner to help you out. There are various tools available online that will help you calculate the amount that you need to target for your emergency fund. All you need is to input the details found on your budget plan. You can check out the emergency fund calculators of the following site: PracticalMoneySkills.com and Calcxml.com. It will help you get started on an amount. If you think that it is not enough, feel free to increase it further. Having a big emergency fund is never a bad thing.
Diana hates debt just as much as you do. She is a finance writer for National Debt Relief. She aims to provide the best information to win the battle against debt.