The common advice on emergency funds, in my humble opinion, is completely wrong. You need to customize your emergency fund to your very specific needs, that are almost as unique as your fingerprint. Here’s how I think we go about figuring out how big out safety net needs to be.
The typical emergency fund advice is that it should cover between 3 to 6 months living expenses. This is entirely too simple a calculation.
First, look at your specific situation and outline all the risk factors for why you will need to pull money from your savings.
- Currenlty Monthly expenses
- potential surprise costs
- number of dependents
- Likley length of dependency
- children in grade school vsl children in final year of collge
- Elderly parents
- Brother with broken hip
- Job security,
- Self Emplyed
- Income stream certainty
- how often do layoffs occur in your industry? company? geographic location?
- If losing your primary income stream is even a possibility, your emergency fund needs to be increased.
- number of income streams
- people with multiple income streams need less emergency funds
- Anyone with only one source of income needs to increase their emergency fun significantly
- Disabilty Situation:
- will you be paid your income if you are disabled
increase the number of months of reserves. Self-employed individuals or those with variable or uncertain income streams may want 12 or even 18 months of reserves.
Once the fund is established, divert those savings to regular savings and investments.
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