In this article, we will discuss the importance and amount of money that should be available in your emergency fund. We will also talk about how to balance retirement savings, emergency funds, and large purchases. We will provide tips on the percentages and financial formulas that can be used as a guide.
How much should I have in my emergency fund?
When it comes to an emergency fund, it is generally recommended to keep the equivalent of three to six months’ worth of expenses in case of an emergency, but this depends on how cautious you are. It is preferable to keep the equivalent of six months’ worth of expenses, as this emergency fund can cover rent or mortgage payments, utility bills, groceries, and other essential needs such as car loans and other bills.
However, small emergencies happen quite often, whether your car needs a new radiator or a costly roof replacement. You wouldn’t want that to drain the emergency fund you keep in case something happens to your income. The additional amount you should keep for significant and necessary expenses will depend on your personal situation and circumstances.
You should ask yourself about the emergencies you can anticipate based on the things you own and their general condition. For instance, if you don’t own a home or a car, you may not need to save as much as someone else. There are other questions you should also ask yourself: Do you have insurance that covers the costs of repairing broken appliances or losses due to fire? Is your car still under warranty to cover repair costs? Did you buy these items new, or are they old and likely to require repair in the near future? If you have a pet, do you have health insurance to cover healthcare costs?
And if you plan to purchase something big in the future, such as a car, you should factor in maintenance and repair costs into your budget. For example, you should set aside between 1% and 4% of your home’s value for maintenance, while car repairs can cost you over $1,900 annually, depending on how much you use the vehicle.
How to balance saving for retirement, emergency funds, and large purchases?
I realize that saving for an emergency fund, retirement, and investment, alongside enjoying a vacation or buying a home at the same time seems very challenging, but it is possible. The best way to do this is to create a budget that includes all these financial needs and goals. A common distribution is 50/30/20, where half of your income is allocated to your needs, 30% to your wants, and 20% to savings. However, if you want to increase your savings, you can easily adjust the formula to fit your situation. By creating this budget, you will be able to save money to achieve all your financial goals.
Good luck!
– Christine
If you have questions about money, Christine is here to help. Submit an anonymous question and it may be answered in a future article.
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Sources:
- Federal Reserve. “Indicators of Financial and Macro Economic Risks of Recession.”
- Wells Fargo. “Emergency Savings.”
- State Farm. “How Much Should You Budget for Home Maintenance.”
- AAA. “What Does It Really Cost to Own a New Car?”.
Source: https://www.thebalancemoney.com/how-to-save-for-emergencies-5510048
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