Evaluating Your Emergency Fund

One piece of financial advice that often gets ignored is that you should create an emergency fund. Having some money saved can help you avoid turning to signature loans to pay for a sudden home repair or medical bill.

However, many people are uncertain how much of an emergency fund they should have, or what other financial reserves they may be able to tap.

How Big Does An Emergency Fund Need To Be?
There are varying pieces of advice from experts about how big your rainy day fund should be. Fidelity says having enough for three months of living expenses is a good start, while Kiplinger has recommended closer to six months.

However, there’s no one set answer to this question. The real solution is to find what makes sense given your personal situation. New York Times financial columnist Carl Richards says that you might want to call it an uncertainty fund instead of an emergency fund.

The size of that cash reserve can then vary based on the level of uncertainty you have in your life.

For example, if you work in a career where your monthly income can fluctuate significantly – such as sales – you may want to build up a larger savings cushion in case something hits during the slow season. In the opposite situation, someone whose income is very stable and doesn’t have much uncertainty may be able to keep a smaller amount of savings on-hand.

Other bits of uncertainty people should evaluate may include:

• The likelihood relatives may need financial support
• How frequently car repairs are needed
• If seasonal factors (like weather) might affect household expenses like heating bills

Other Places To Look For Financial Support
If saving up that amount of money just isn’t feasible, you can look to build up some kind of cushion in other ways. Those alternative solutions can help you deal with a major life event that might otherwise cause you financial trouble.

• Home equity – If you have a home loan and have built up some equity in your property, you may be able to refinance in the event you need money. While this may involve stretching out your home loan and paying closing costs, it can be a better option than other financial safety nets.
• Retirement accounts – If you have a 401(k) plan or other retirement account you may be able to take a loan from that amount if you are faced with a sudden financial hardship. However, just be aware that there may be penalties involved with these loans. In addition, the money you take out will not be earning interest for your retirement like it otherwise would be.
• Insurance – If you have strong disability and other insurance protections, then you may be better able to weather a sudden injury or other issue that puts you out of work.

In the end, the size your emergency fund should be is dependent on you and your individual situation. Review your standing before you start saving. That way you can start budgeting with a firm goal in mind.