Over the past year, far too many Americans found themselves in the unfortunate position of having been laid off without warning, and while job prospects seem to be slowly picking up, the country on a whole is still not out of the woods. In today’s volatile economy, more and more people are coming to recognize the importance of having extra money on hand in the event of an unexpected job loss. As a personal financial representative who spends his days helping clients budget for both the present and the future, Jim Barker of Barker Insurance Services constantly makes it his business to teach people about the necessity of having an emergency fund.
The purpose of an emergency fund is to provide you with enough money to cover three to six months’ worth of living expenses in the event that you lose your job and have no other means of supporting yourself. Over the past year, there is no doubt that many Americans found themselves dipping into their emergency funds when they suddenly found themselves without work. Of course, some people tend to make the mistake of relying on unemployment checks to cover the cost of living in such situations. Although unemployment checks can help, in many cases, they represent only a small percentage of a person’s previous income. There are also certain scenarios in which a person might lose a job but be ineligible for unemployment. Therefore, it’s better to think of unemployment as a secondary financial lifeline, and take matters into your own hands via an emergency fund.
To calculate the amount you’ll need to store away in your emergency fund, take the following aspects into account:
Housing
For some people, housing is an easier expense to account for than others. Those who rent can easily narrow down this figure to a set amount, but for homeowners, the idea of calculating housing costs can be a bit more challenging. If you’re a homeowner, not only do you have to account for the cost of your mortgage, you also have to include property taxes, homeowners insurance, and potential home repairs. After all, if a toilet breaks in your home, you can’t wait six months to fix it.
Transportation
Even though your transportation costs might go down as the result of you not having to commute to work every day, you’ll still need to be able to cover car insurance and maintenance, as well as the cost of getting to interviews.
Utility bills
Don’t assume that you’ll be able to cut corners by canceling your cable and Internet service or being cheap with electricity and heat. Chances are, you’ll need the Internet to find a new job, and since you’ll be home more often, your electric and heating or cooling bills will probably go up.
Health Insurance
Unless you’re willing to risk it (which you shouldn’t be), once you’re unemployed, you’ll need to pay for the cost of health insurance for yourself and, if applicable, your dependants. Even with COBRA, health insurance cost can be significant, especially depending on the number of people you’re paying for.
Obligations
While your close friends and family members might understand if you’re not your usual generous self during your period of unemployment, certain obligations are far more difficult to get out of (such as a wedding gift). Put aside some extra money for this purpose to play it safe.
Minimal entertainment
It can be difficult to spend days upon days cooped up at home searching for a job without entertaining yourself at all. Include enough money in your fund to treat yourself to two modest nights out a month (think of it as an investment in your sanity).
Once you’ve established how much money you’ll need to cover a month’s worth of bills, you’ll need to multiply that figure up to six times to reach the targeted amount of your emergency fund. If your living situation is such that it doesn’t involve too many financial commitments (such as renting instead of owning), then a three-month fund might be sufficient. However, if you have any dependants or own property, then you’ll definitely want to shoot for the six-month mark.
In an ideal world, your emergency fund would be one that you’ll never have to dip into, and can instead pass on to your beneficiaries after a long, financially healthy life. However, the reality is that financial emergencies can arise, so it’s a wise idea to take steps to protect yourself from a monetary standpoint. In fact, you can think of your emergency fund as an economic security blankets of sorts: As much as you’d rather not use it, it will be there for you when you need it the most.
