Building an emergency fund is one of the best ways to create a feeling of financial security. But how much do you need in an emergency fund?
The short answer is that every situation is different. Your emergency fund is a function of your belief system, job, and financial literacy. Let’s cover each of these in-depth.
Your belief system. How you feel about money is the relevant action towards building your emergency fund. How did your parents treat money? Did they ever master how to expand their resources?
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A couple of books help you determine where your money mindset lies. “Know Yourself, Know Your Money” and “Effortless Money” help you expand your thoughts about money and your current situation.
If you don’t trust money, or your ability to make money, you are more than likely to keep a massive stash of cash in your savings account. You will feel more comfortable looking at your money in your account than in the stock market or real estate.
This feeling is similar to people that stuffed all their money under the mattress. You want to understand where your money habits come from and overcome those limiting your behaviors.
Your job. Your job dramatically affects how much money you keep in your emergency fund. You can break this down into paycheck reliability, job security, and retirement date.
Paycheck reliability. Some jobs are “feast or famine,” which means one day you are a hero and the next you are a zero. If you are in sales, you’ll understand how the process works.
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For example, currently used cars are all the rage. The prices of used cars spiked because of chip shortages and supply chain issues. If you are a used car dealer, you have been on fire.
But is that guaranteed to continue? You’ll need to build an emergency fund that fits your future prediction of the markets.
You may want to keep one year of expenses to ensure that you and your family are good if the used car market swings in the opposite direction.
Job security. You may have a decent job, but that doesn’t mean it is secure. If the stock market continues to fall, companies must institute layoffs.
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Your job security may be questionable if you don’t work for the government. Do not trust your company with your livelihood.
Many jobs are also looking to automate their services and reduce their workforce. This is a product of technology and has happened throughout history.
If you are in a job, you’ll want at least six months of expenses in your emergency fund. Potentially even a year, if you hear rumors of a layoff coming down the pipe.
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Retirement Date. When do you plan on retiring? As you prepare for retirement, you’ll want to increase your emergency fund to at least two years of expenses.
Why such a large amount? You don’t want to retire into a down stock market or depressed real estate situation. If you have to sell stocks to fund your first year of retirement, this may hurt your entire plan.
If the stock market plummets, you’ll have cash on hand for two to three months until you get a better handle on the situation.
How does an emergency fund look? You don’t need to have your entire emergency fund in a savings account.
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First, you should be using a high-yield savings account (HYSA) that you separate from other savings and checking accounts. I like to use Discover as my HYSA of choice—it currently pays 0.80%
What’s your most likely emergency, and how much does it cost to fix? If you are a homeowner, having $10,000 is a good amount to keep in an HYSA.
This is because your roof or air conditioner is your most considerable expense. If you live overseas, how much do you need to return to the States quickly?
Allocate the rest of your emergency fund. Luckily, I wrote an article about how to build a high-yield emergency fund, so I’ll reference that for your reading pleasure.
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Multiple streams of income. The most important part of your emergency fund is understanding the entire situation. Don’t rely on your emergency fund as a backup to losing a job.
The best way to prevent the effects of losing a stream of income is to have multiple streams of income. Even if you don’t make a lot of money on your secondary income streams, it’s good to start them when times are good.
Let’s go through a few examples of small income streams you can start if you have a job and times are good. Read the book “Creating Income Streams” for more on this process.
- Baking. You can sell a certain amount of baked goods without certifying your kitchen. Understand the rules and start a small baking business.
- Sewing/Knitting. Personalized goods are always in demand. Learn this helpful skill set.
- Content creation. Start creating content in your house.
- Website. Websites take time to gain authority. The sooner you start your blog or e*commerce site, the sooner you start making money. This is at least a three-year process.
- Gardening/Outside. If you love to garden, start selling your products and documenting your journey.
- Rent your car. Car rental businesses will be all the rage as more people decide to forgo keeping a permanent automobile.
- House hacking. My favorite way to make money is by renting rooms or spaces in your primary residence.
The purpose of an emergency fund. The purpose of an emergency fund is to shore up some cash flow while you build out another income stream.
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Don’t rely on living on your emergency fund for a year as you look for a job. Once you deplete your fund, it will take years to rebuild it.
Think of an emergency fund as an ambulance versus a hospital. The ambulance helps you get from point A to point B. The hospital patches you and gets you back to work.
A quick example. Let’s say you make $6,000/month from your job. You also have $2,000/month from various income streams like renting rooms and baking.
Your total expenses are $3,000/month. If you lose your job, you can leverage your other income streams and $1,000/month from your emergency fund to pay your bills.
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But here’s the kicker. You should now increase the income from your other income sources while looking for a job. For example, maybe you can rent another room in your home for $800/month.
The idea is to prevent using your emergency fund—consider it a sacred treasure. Leverage your knowledge of renting rooms and baking to get you by until you get another job.
Conclusion. Having an emergency fund is not there to make you lazy—you should prevent yourself from liquidating it at all costs.
You want to use your emergency fund in conjunction with multiple income streams to create financial security in your life.
USDC vs. Saving “I” Bonds
Saving is a great tool to use in your life; however, it is a function of time and discipline. It may take you three years to fund a six-month emergency fund.
You need to protect this money at all costs because you may not have three years to grow this again the next time. Learn to create money by using multiple income streams to reduce your likelihood of losing cash flow.
If you are having trouble saving for an emergency fund, something in your life is out of balance. Either you’re spending too much on expenses (housing) or wants (shopping).
The book “All Your Worth” describes my favorite method to determine where you are hemorrhaging money. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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