Monday, August 2, 2010

Monday Money Sense- Emergency Fund

How Much Money Do I Really Need?
Today we are going to look at how to calculate how much money you need to have in your emergency fund. But before I start that I would just like to remind people if they are still in debt pay-down mode, it would be wiser to put money toward debt than to build 8 months of savings, however you should have a small emergency fund of $1000 or one month's income to cover things like a deductible on insurance. So without further ado, the steps to calculate how much you really need. 
  1. Pull Out Your Budget. After all, your budget should give you a very good indication of how much money you use every month. Write down the amount of expenses you have every month.
  2. Look for Things that Go Away with Your Paycheck. For example, if you are now living off of your emergency fund because you have no income, you won't be putting money into it. You may also not be making donations. Subtract these items from your expenses.
  3. But Remember Some Things May Cost More. For example, if you choose to keep insurance coverage through your employer you may be paying more to have COBRA. If you know exact amounts for these then add them to your expenses, if not I would add 10% of the amount in #2 for things that may cost more.
  4. Multiply Multiply this number by the number of months of emergency fund you want. 
Other Things to Consider
  1. Do You Have Food Storage? If you do you can reduce money going toward groceries, I wouldn't eliminate it completely because you may find yourself needing to pick up some fresh items, etc. depending on how much food storage you have and other self-reliance techniques you have mastered.
  2. What Can You Do Without? Cable? Internet? Dining Out? There are lots of things that are probably wants... However, only eliminate these things if you truly believe you will cut them out if necessary. Be realistic about it, don't eliminate a cell phone completely if you have no other phone because how will a future employer contact you? You'll also need to look at contracts for these items because while you may be ok with giving them up, the company may smack you with a big fee to do so.
  3. Are There Any Life Changes in the Near Future? If you are about to have a child, you will have more expenses. Did you buy a house? You might want to save more to cover any expenses for your house.
Hopefully this gets you thinking about how much you need. It's not an exact science, and there is no magic formula. 
For more in the Monday Money Sense Series, click here.

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