Life throws curveballs—it’s one constant we can (unfortunately) count on. That’s why an emergency fund is critical to your finances—it is financial insurance against costly repairs and unexpected bills. But how do you know if your fund is strong enough?
THE 3-6 MONTH RULE IS NOT THE FINISH LINE
Most financial gurus preach the gospel of 3-6 months’ worth of living expenses as the baseline for an emergency fund—this is a solid rule of thumb, but your personal “enough” might be a different number for various reasons.
- Job security: Are you in a volatile industry, or do you have a secure, long-term position?
- Dependents: Do you have a family relying on your income? More mouths to feed mean a bigger buffer.
- Health risk: Are you or someone close to you prone to medical emergencies?
- Debt: Do you have significant debt payments that would become unmanageable with a job loss?
- Lifestyle: Do you have high fixed expenses like a mortgage or rent?
Each of these items adds potential financial risk—the higher the risk of these factors, the bigger your emergency fund should be.
YOUR EMERGENCY FUND CHECKLIST
- Set up an FDIC-insured high-yield savings account that can be accessed easily, but not too easily, so you can avoid impulsive spending! It may not earn much interest, but its purpose isn’t for investing—it is financial insurance!
- Track your essential expenses like housing, utilities, groceries, and transportation—this gives you a baseline for calculating your emergency fund needs.
- Add the estimated costs of potential emergencies such as car repairs, medical bills, and appliance breakdowns to your baseline emergency fund to calculate your target emergency fund.
- Even if starting at $0, set aside small amounts of money to gradually build your emergency fund over time to fund your baseline and eventually your target emergency fund.
- Your life doesn’t stay static, so neither should your emergency fund. Review your financial situation and adjust your emergency fund goal, especially after significant life changes like job loss, family expansion, or debt reduction.
A fully funded emergency fund provides greater financial peace than I can articulate—I highly recommend it! If you don’t have an emergency fund yet, start today! P.S. If you want more financial advice, check out my website at www.sterlingwealth.net or contact me on Linkedin! I’m pretty sure it will be more entertaining than reading the terms and conditions of your bank account!
