As the events of the last few months have brought into stark relief, the world that we live in can be a volatile and unpredictable place. Taking measures to insulate yourself from inevitable unforeseen financial shocks is the only prudent course of action if you want to make it through times of economic uncertainty. In basic terms, what this means is having the foresight to put money aside for an emergency fund. But how much you are going to need depends on a number of factors.
Read on for some useful tips for working out you to calculate what you will need to see you through the tough times.
The Size of Your Emergency Cash Fund
The amount of money that you will need for an emergency fund depends on your personal situation. It will typically depend on the amount you are able to put away, your average monthly outgoings, your financial obligations and your current employment situation.
Most financial advisors will tell you to calculate your average monthly expenditure. This figure should then be multiplied by a factor of between three and six depending on how many months you feel like you want to be covered for. When you are coming up with a figure, you should consider the following things:
- Mortgage or rent payments
- Home insurance
- Home maintenance costs
- Car payments and insurance
- Transportation costs, including gas and bus or train passes for commuting
- Water, electric and gas bills
- Cable, phone, and internet bills
- Medical costs, including medication and insurance premiums
- Clothing and other such necessities
- Toiletries and personal care items
- Childcare or preschool costs
- Any other expenses not covered in this list
When making your calculations, it is always wise to overshoot what you expect to spend by around 10-15%. Unless you are very strict when it comes to your budget, it is normal for most people to overrun slightly on leisure activities and other treats. Maintaining this buffer will give you a margin for error that you could really appreciate if you ever find yourself in a financial crisis.
Where to Invest Your Fund
While it does not make good financial sense to keep your emergency fund under your pillow, investing it can also pose problems when it comes to liquidity. Emergencies can happen at any time without warning, so being able to access your funds at short notice is essential. Try to invest your money in a high-yield savings account with a competitive interest rate which you can access anytime without too much trouble. Otherwise, you can put your money in a high-interest money market account which is accessible via web-based account management or at an ATM should you come to need it.
The importance of building an emergency fund cannot be overstated. You never know when you could lose your job, suffer health problems or become involved in a legal wrangle not entirely of your making. If you follow the advice above, you should be able to come through most situations that lead to financial difficulty without suffering too much.