If you have been reading our posts, you’ve probably seen (more than once) us mention the importance of having a financial safety net. Knowing that you have cash in the bank in case of a financial emergency will help you sleep better at night.
But how do you calculate this amount and how do you start? You need a plan. Here’s a handy (we hope!) guide to figuring out how much to put aside for that rainy day.
Some financial advisors believe that a three-month safety net is the best option while others urge clients to aim for six months. Since it’s easier to get to three months than it is to reach that six-month goal, we recommend you begin with a three-month net -- you can, and should, add to that fund regularly to reach the preferred six-month objective.
So how much do you need? Calculate the following:
- Rent or mortgage payment
- Cost of groceries (three months)
- Price of gas or public transportation pass
- Credit card bills and other payments
- Student loan payments
Any bill, purchase, or payment that you make monthly should be included in your calculation. For most people, this might mean somewhere around $3-$4,000 -- if you want to reach that six-month goal, just do the math. I know what you are thinking. If I had $10,000, I would pay my bills. I understand that, but, you will still need a rainy day fund.
If you currently work as a contractor or freelancer, the amount of money that you put aside should be larger. If your partner is a freelancer or contractor, make sure to account for a monetary loss should work cease.
How to Begin
It’s not feasible to take $4,000 out of your next paycheck and put it in the bank. If you could do that, you are wasting your time reading this post. Remember that Rome wasn’t built in a day and neither will your emergency fund. This will take time, patience and determination, but it will be worth it as you see your emergency fund begin to grow.
So, set a goal that works for you on a monthly basis. This could be $100 or even $50. You don’t want to set the goal so high that it hurts your monthly budget. You want to make progress and see the results, but you don’t want it to cause too much pain either. Whatever amount you decide on put it aside each month in a special bank account and don’t touch it. It would be great if you could set it up electronically so you don’t even see the transaction. For example, when your paycheck hits your bank account, set it up to automatically transfer $25 to savings.
Trust us, you will feel much better when you have a safety net set aside for an emergency - we hope that day never happens but if it does, you’ll be ready.