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The Essential Guide: How Much Should You Save in Your Emergency Fund?

Catherine Miller
17/08/2023

Did you know you have a 250,000,000/1 chance of dying from a falling coconut? Or, if you are left handed, you have a 4,400,000/1 of being killed using a right-handed product?

Yes, ok, these incidents are highly, highly unlikely. But the chances of everyday emergencies affecting you are worth considering. For example,

The key message? Life is unpredictable, and unexpected expenses can arise at any time. 

Why having an emergency pot is essential

An emergency fund is a pot of money set aside just in case things go wrong. If you have money set aside for emergencies, you’re far less likely to experience financial difficulties or have to borrow at a high interest rate if things go wrong or your circumstances change. Knowing you’ve got some money tucked away might help you sleep better at night too.

How much should I save?

The question that often arises is, “How much should I save into an emergency pot?” 

In this article, we’ll delve into the factors that influence the ideal amount for your emergency fund and why having one is essential.

  1. Assess Your Monthly Expenses:

The first step in determining the size of your emergency fund is to assess your monthly expenses. Create a comprehensive list that includes rent or mortgage payments, utilities, groceries, insurance, transportation, and any other regular bills. Add up these expenses to understand your basic living costs.

  1. Calculate Three to Six Months’ Worth of Living Expenses:

Financial experts commonly recommend saving three to six months’ worth of living expenses in your emergency fund. This range provides a safety net that can cover your essential costs in case of job loss, unexpected medical expenses, or other emergencies. If your job is less stable or you have dependents, aiming for six months’ worth of expenses may provide additional peace of mind.

  1. Consider Your Job Stability and Income:

Your job stability plays a crucial role in determining the size of your emergency fund. If your job is less secure or if you work in an industry with frequent redundancies, leaning towards the higher end of the three to six months’ guideline is advisable. Additionally, consider the stability of your income – those with irregular income may need a larger emergency fund to cover fluctuations.

  1. Evaluate Your Lifestyle and Dependents:

The size of your emergency fund should also take into account your lifestyle and dependents. If you have a family or dependents relying on your income, it’s wise to err on the side of caution and aim for a larger emergency fund. Consider the potential expenses that may arise for your family, such as medical bills or unexpected home repairs.

  1. Consider insurance as another option

Buying insurance involves you paying a regular fee to ensure you’ll get compensated if an unexpected event occurs. Insurance can be an alternative way to protect yourself and your loved ones. Find out more about the types of insurance you can get here.

Key takeaways

  • Building and maintaining an emergency fund is essential for financial stablity and peace of mind
  • Experts recommend you save 3-6 months of your salary or regular income
  • You’ll need to think about your specific circumstances to work out if you need more or less than this amount
  • Consider if insurance could be another option to protect yourself
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