Do you have enough money saved if you lose your job? To pay the bills in case you can’t work because of illness or injury? What about a smaller expense, like the air conditioner, water heater, transmission or brakes? Many people do not have an emergency fund large enough to provide peace of mind in an emergency situation.
How much do you need?
A good rule of thumb is to have at least 6 months of living expenses set aside in an interest drawing savings account. That means 6 months of mortgage payments or rent, utilities, groceries, gas, etc. Everyone’s situation is different, therefore there isn’t a mathematical formula to give you that magic number, but rather an estimate on how much you spend on the necessities of life.
Most people can trim their budget significantly by controlling frivolous spending each month. In an emergency, do you really need those shoes? That video game? A monthly manicure? Probably not. You need to eat, stay clean and pay the bills. But, you should also be able to maintain a standard of living similar to what you are used to. That said, don’t cut out all the fun money. Go to a movie, dinner or ice cream. You may also want to consider trying new kinds of “free” fun. Walk in the park, visit a museum or free exhibit, play board games or pop some popcorn and get out some old classic movies that you forgot were in your cabinet.
If financial peace of mind has been worrying you lately, start by figuring out your number. Set up a savings account and begin building the account each paycheck until you reach your goal. Consider having the money automatically transferred into the account so that you don’t realize the money is missing. You can start with small deposits and work up to larger amounts as you can afford it. Emergencies and expected expenses happen all the time, sometimes two and three in a row. To help you sleep better at night, take small steps towards financial freedom and prepare yourself for surprise costs.