A Fully-Funded Emergency Fund
Spend any time learning about personal finance and you’ll soon come across the idea of a “fully-funded emergency fund”. But what is that, exactly? The reigning experts all give different answers, stating that a fully-funded emergency fund will cover anywhere from 3 months to a year or more’s worth of expenses.
So who’s right?
Well, as the saying goes, personal finance is personal, and that means that you are the one who decides whether or not your emergency fund is fully funded. After all, you’re the one who has to live with the potential consequences of having too little or (rarely) to much set aside in case of emergency.
The expert opinions are useful in that they can be looked at as a starting point or a rule of thumb, but beyond that, it’s your life that you have to take into account.
Things to consider
First, think about exactly what you want your emergency fund to cover. Will it be for job loss only, like ours is? Will it be for things like car repairs and medical expenses too? The more things you consider an emergency, the bigger your fund will need to be.
Since most emergency funds are in place to keep folks going in case of job loss, you should also think about how much of an impact losing your job could have. For example, are you the sole income-earner? Or do both you and your spouse work at the same company? Are unemployment rates high in your area? Do you have extremely specialized skills? If any of those are true, you’ll want to beef up your fund even more because you could potentially end up with no income for an extended period.
Figuring out the amount
Once you’ve decided what it would need to cover and thought about a few worse-case scenarios, it’s time to come up with a dollar amount.
The dollar amount you decide on should be based on your average monthly expenses, plus anything else you want it to cover. Don’t make the mistake of assuming that you’ll cut back dramatically in case of unemployment, either. (Realistically, you probably won’t, at least not at first.)
Come up with your target amount based on that, and then start socking away money until you reach that goal. It may take some time to get there, but having a safety net will be worth it.