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Emergency Fund

How much should you have in it?

Family Using Computer

Every adult should have an emergency fund. Having money to fall back on if your car breaks down or you lose your job will help keep you out of debt and on the path towards financial success. Of course, this begs the question: How much money should you save in your emergency fund? 

There's no cut and dry answer to this question. It would be nice—and simple—if everyone just needed to save $10,000. But the truth is, this is more than some people need and less than other people need.

Rather than rely on a specific financial guru or financial blog to tell you how much you need to have in your emergency fund, you should make this determination yourself. In order to arrive at your number, here are a few guidelines to follow and things to consider.

Save three to six months' worth of expenses.

This is still a big range, but it's a good place to start. Note that the guideline is three to six months' worth of expenses, not three to six months' worth of income. So, if you earn $6,000 a month, but only spend $5,000 a month, then you should aim to save between $15,000 and $30,000 in your emergency fund. From here, you just need to determine whether you belong on the lower or upper end of that range.

Consider your sources of income.

If you only have one source of income, or if one source of income accounts for 75% or more of your income, then you probably want to err on the side of a larger emergency fund. If you were to lose your major source of income, you'd have next to nothing coming in—so you'd have to live off the emergency fund until you found a new job.

If you have multiple sources of income, you can get away with a smaller emergency fund. Chances are, you won't lose all of your sources of income at once, so your emergency fund won't be your only source of cash.

Research your marketability.

Are you in a really in-demand career field, or are you in a niche industry? If you suspect you'd have an easy time finding a new job if you lost yours, then you should be okay with a smaller emergency fund. On the other hand, if you suspect it will take you close to six months to find a new job, you definitely want to save a full six months' worth of expenses.

Know your health risk.

Unfortunately, many people end up digging into their emergency fund when they have a medical emergency. Sometimes accidents happen, and health emergencies are unavoidable. But you should have at least some idea of your health risk.

If you have an underlying condition or health history that means you could need lots of expensive care at some point, then you need a larger emergency fund. If you have high-deductible health insurance or a really restrictive plan, that's another reason to build a larger fund.

On the other hand, if you are young, in good general health, and don't have any reason to suspect your medical needs will skyrocket at some point, then a smaller emergency fund is suitable.

Hopefully, after asking yourself these questions and doing some deep thinking, you have a better idea of how much you should keep in your emergency fund. If you're struggling to get started, make it your goal to save three months' worth of expenses. That's a great starting point, and if needed, you can build a larger fund later on.

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