How Much Should You Have In Your Emergency Fund?
Most experts recommend 3 to 6 months worth of living expenses (not to be confused with income), but what’s right for you? Are you a single income household or dual earners? Is your employment stable or closely tied to the economy? Is your income diversified or from a single source? How many people are financially dependent upon you? How many years has it been since you made major improvements or repairs to your home? Do you have an old car that likely needs to be replaced or fixed sooner rather than later?Do you have a line of credit readily available?
As you can see there are various moving factors to consider. The ultimate question balances on your ability and willingness to save along with your level of comfort in how much cash you have stashed away. In other words, some may be completely fine having a month or two worth of living expenses in cash and, in the event of an emergency, they may be more open to cut into their discretionary spending budget – effectively increasing the longevity of their emergency fund. Others may be unwilling to or unable to reduce their expenses because they are over leveraged or have less flexibility in their budget.
So what should you do? First, you need to evaluate your vulnerability to an emergency – the questions referenced above would be a great way to start. Then you should take a moment to add up your current expenses, discretionary and nondiscretionary, and stack them up against your income to determine your future cash flows. Once you have it all written down, you’ll have a better gauge of how much you’d be comfortable with having as an emergency fund. After all, despite the 3 to 6 month rule of thumb, it’s ultimately a matter of preference.
If you are interested in learning more about financial planning or investing, please feel free to contact Perennial Trust at (781) 202 – 6368, email email@example.com or visit our website at TrustPerennial.com. Conveniently located at 477 Main Street, Stoneham, MA.