Emergency Fund – What’s reasonable?

Many financial planners say to have 2-6 months worth of expenses saved as an emergency fund.

While I agree with the thought, this is a little restrictive for those just entering the workforce or trying to dig themselves out of a financial issue.

With an eventual goal of 2-6 months worth of expenses in an emergency fund, start smaller.

Start with a goal of $500 (or maybe a $1,000).

This will cover most of your basic emergencies (car breaks down, unexpected bill) and basic medical costs – though, obviously, not the high value medical emergencies.

Once you reach this threshold, determine what financial goals are next.

For example, if you have credit card debt rolling over (and you’re paying outrageous interest rates), focus on these next.  Throw all your money towards these.  (Really, everything…this should be priority #1 after a positive cash flow and an emergency fund.)

On the other hand, if you don’t have any credit card debt, but your employer matches contributions to your retirement account, start adding money to your retirement – at least meet the matching amount.  (Free money!)

If your next financial goals do not involve high debt issues (credit cards), then allocate your money towards your goals PLUS your emergency fund.

Add monthly increments to the emergency fund until you reach the 2-3 months of expenses point.

This may be a reasonable amount for you – if you have a stable job, live well below your income, and you have support (financial, family, etc.) in the case of a terrible emergency.

If you are self-employed or the sole-income earner, then you should probably strive for the 6 months (possibly more) of expenses in your emergency fund. This will help protect you from losing a large client or the impact of a family (or medical) emergency where you cannot work.

As your income increases, as you get raises, tax refunds – put additional monies toward your goals.

Yes, you should be striving for a large emergency fund. One that will cover 2-6 months worth of your living costs. This will allow you piece of mind in those financial emergencies.

But! You do not need to wait on your dreams or wait to make financial progress in your goals.

Small steps forward is still forward motion.

The key is starting forward. You can always change your speed as you go.

Do you have an emergency fund? How much do you keep in it?

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