You all read about the mighty emergency fund that you need to save in your budget. The reason behind an emergency fund is to cope with problems that can come up, that was not the plan.
The objects of an emergency fund is not to prepare your next trip to the Bahamas because you’re tired of winter, that’s not an emergency. We are talking about a big problem, like you or your partner losing their job, your house is suddenly flooded, your roof is leaking, your car suddenly gives up and you need to buy a new one. You may own insurance for some of those problems but you may not be covered or the reimbursement can take a very long time.
It’s important to differentiate an emergency fund from normal repair fund. If you own a house or a car, there are regular repairs that need to be done, again they are not considered as an emergency. They should be budgeted in a separate category.
How much you need in your emergency fund depends on your situation. The expert consider having a four to six-month threshold. That means, if the total of your expenses for the year is 30 000$, your fund should contain around 12 000$ to 15 000$. You can’t budget that amount only in the first years, this fund needs to be built up in the first couple of years of your adult life. When you have kids, have a home or own a car you need to think about building your emergency fund.
Here is an example of the type of calculation you need to do :
Let’s say your net earnings is 40 000$ and your expenses come up to 30 000$/year, let’s assume you will get a 2% raise every year. If you put aside 5% of your net earnings in the fund, it will take 6 years to get to 12 000$ (12 616$) (Click to enlarge) :
If you use Budget Express, here is the amount you would need to put aside every month for the next six years (Click to enlarge) :
It’s important to understand that in this example, it takes six years to supplement the fund. That will be possible if you never have to use the money during this period. You need to adjust your percentage if your expenses also vary.