Having some money saved up in the bank is crucial when it comes to expanding your financial portfolio and covering your bases just in case something happens. It’s important to have extra money in the bank because you never know what unexpected expenses will surface. You can say that won’t happen to you, that you can take it as it comes, but just because you’ve dealt with great expenses before doesn’t mean you’ll be able to in the future as well, so why not be extra prepared? You never know if you’ll end up losing your main source of income and you never know how long it will take for you to get it back again. As a result of this, many financial experts advise that 6 months’ worth of household expenses is the proper amount to have stored up “just in case.”
How Much Will You Need?
The problem with coming up with a 6 month emergency fund is that we all have different expenses and 6 months for Person A may be entirely different than 6 months for Person B. It is important to calculate exactly how much you typically spend per month and then simply times that by six. Be sure to include all your expenses such as rent/mortgage, utilities, transportation costs, food, clothing, minimum debt payments, insurance, car payments and anything else you spend your money on within the course of any given month.
Write it all out so you have everything right in front of you; use a spreadsheet if it makes it easier to organize yourself. While you are writing down all your expenses, you may want to omit the amount of money you devote to other investments, the amount of money you put into savings etc. Keep it strictly expenses so you know exactly how much you would need to set aside in order to keep afloat, not including any “extra” purchases.
After you’ve added up all your expenses for the month and multiplied it by six, you have your savings goal.
Saving Your 6 Month Emergency Fund
For the majority of people, their monthly expenses (after everything is all tallied up) are around $3000 USD. This is enough to survive with a little bit left over if you know how to manage your money, but not enough for most people to be fully satisfied with. This is where most people fall, so we’ll use $3000 as our base mark. So in order to cover a 6 month emergency fund, you would have to have about $18,000 ($3000 times 6).
Yes this is a very large number and you might be shocked at first glance. You might be thinking that there’s no way you could save up that much. I mean who has $18,000 lying around? If it’s too much to comprehend at the moment, cut it in half and work towards putting away a 3 month payment. After you achieve this, you can set aside another 3 month payment in order to reach your goal. Even just $9,000 (half of $18,000) can be difficult for most people to set aside, let alone twice that amount, but it’s a good number to start with. Yes this is going to require some serious effort but it’s worth it in the long run. We live in uncertain times in an uncertain economy and you never know when something unexpected will pop up such as an injury, repairing your car or roof or even losing your job and this can have a significant effect on your ability to pay your basic bills.
Without this 6 month emergency fund you may very well be stressing on how to even survive; most people don’t have enough in their savings to even cover a month’s worth of expenses and a large percentage of people polled said that they would be financially screwed if their pay check was delayed by even just a couple of weeks.
So How Can You Save Up This Much?
There are 2 ways to save up $9,000 (or $18,000 if you want to get to it all in one go); you can save up this amount in an entire lump sum, or you can save up a little bit every time you get paid until you eventually reach your goal. Both of these methods work but you have to decide which one would work better for you and your specific financial situation.
Saving up in one lump some may not be possible for some individuals, but it may work best for those who have that kind of money already lying around, or simply by transferring funds from their financial portfolio to their 6 month emergency fund. This may also work better if funds are tight, but you know that you’ll be getting a nice chunk back from your income tax return, and you plan on putting that money into your 6 month emergency fund. You can also do this if you receive a nice bonus at work, a Christmas bonus or any other large amount of money that you end up receiving.
The other way to put this savings plan into action is by putting away a little bit each month (or every time you get paid). You should treat this like an actual bill and be very serious about putting money away each month, even if it’s only a couple hundred bucks. If you keep doing this every month, you will eventually reach your goal. Just by cutting out a few basic expenses such as staying in the city for your 2 week vacation or bringing your own lunches to work, you can easily get extra money to put into this fund.
If you want to get this fund over with quickly, you can make more drastic changes to your lifestyle by moving to a less expensive apartment, taking public transportation instead of driving or cabs and limiting the amount you bring on any outings. Keep in mind that the more your put away, the faster you will have your 6 month emergency fund and the faster you can go back to your regular lifestyle.
For those of you that are not willing or able to change your lifestyle, you can read more about quick saving tips at 10 Tips for a Frugal Lifestyle and 22 Ways to Fight Rising Food Prices.
Saving up this much money will take some time and sacrifices so don’t be discouraged if you can’t reach your 6 month emergency fund goal within one year. Just try to put as much away as you can and keep going. It may seem hard at first but with every passing month you’ll see your bank account start to fill up. The important thing to remember when you are saving up for a 6 month emergency fund is that you are saving up for an emergency. This means you should resist any temptation you may have to dip into it early for incidental expenses.
For most people, it can be hard enough saving this amount of money up in the first place and can even take years. Once you start using it like a bank account for a new car or a nice vacation, it can be very difficult to save it back up again. You want to make sure that you and your family are protected in case something should happen to your main income so don’t lose sight of that as you put money away. You may want to “reward” yourself for doing so well by spending it on something else, but you have to be consistent in order to maintain your savings. It will get easier and easier to keep putting this money away as your account starts to grow and as you get into the habit of putting this money away.
The last thing I want to mention in this article is if you haven’t done so already, start saving up for a 6 month emergency fund now. You never know when an emergency fund will strike and it’s better to have that money now rather than later. You might want to put it off because it’s not really a pressing matter, but if an emergency comes up, it will be very pressing and in most cases, you won’t have the time to start saving up then. Protect your future by saving today. Even just a little bit in the bank will help you sleep better and night and will make a huge difference if an emergency does happen.
The image used in this post is taken from Image: Stuart Miles / FreeDigitalPhotos.net
