Is Your Emergency Fund Big Enough?

So you’ve taken steps to build an emergency fund. That’s great and it shows that you’re preparing for the future. You’re clearly somebody who knows how to manage your personal finances.

Now, the questions becomes: is your emergency fund big enough? Here are a few pointers to help you answer that question.

Think About the Worst Case

There are many reasons to build your emergency fund. For example, you might have a serious medical emergency that you need to pay for or you might need to handle some expensive maintenance on your home.

However, there is another “expense” that you should consider as you fatten your fund. What if you’re out of work for four to six months? How are you going to make ends meet during that time?

Sure, you’ll probably have some unemployment coming your way, but that’s nowhere near as much money as you’re accustomed to earning. That’s why you’ll need an emergency fund.

Keep adding to your emergency fund until you’re convinced that it can handle a worst-case situation. Of course your definition of “worst case” might be different than somebody else’s. That’s why it’s important to evaluate your financial situation based on your own tolerance for risk.

Don’t Forget About Compounding

The best place to put money for your emergency fund is into a savings account. That way, you’ll earn a little bit of interest while anticipating the emergency.

Keep that in mind as you’re adding to your emergency fund. You’re not the only one adding money to it. The bank literally pays you to keep your money there. The more that the bank helps you build your fund, the less you’re required to contribute.

Also, don’t forget about the beauty of compound interest. You’re not only earning interest on the money that you put into your emergency fund, you’re also earning interest on the interest itself. That’s a great way to fatten your fund.

Of course, as of this writing, interest rates on savings accounts are so low that they’re almost not worth considering. However, rates aren’t likely to stay that way forever. In a few years, you could be looking at a handsome return on your savings account by just leaving it alone.

There’s No Such Thing As “Too Much”

As you’re thinking about how much you need in an emergency fund, keep in mind that there’s really no such thing as an emergency fund that has “too much” money it. That’s because you can never predict the kinds of curve balls that life can throw your way. Some of those curve balls can be very expensive.

If you’re unsure about how much you need, then err on the side of caution and keep adding to it.

If you don’t want to browse for emergency loans when you get hit with an emergency expense, then you’ll need an emergency fund. Just make sure that it’s big enough to support you in the event that you’re hit with a major expense.