How Much Emergency Cash Should You Keep in the Bank
Having an emergency fund is essential for managing unexpected financial emergencies. It is recommended to keep at least three to six months' worth of expenses saved for unexpected events such as job loss, medical bills, or car repairs. But how do you determine the exact amount of emergency cash you should keep in the bank?
In this article, we will guide you through a step-by-step process to determine the ideal amount of emergency cash to keep in your savings account. By following these six steps, you will be able to find a personalized number that works best for your financial situation.
1. Define Your Total Monthly Expenses
The first step in determining the ideal amount of emergency cash you should keep in the bank is to define your total monthly expenses. This will give you a baseline for the amount of money you need to cover your monthly bills and expenses.
Fixed expenses are the bills that stay the same each month, regardless of your income. These expenses include your rent/mortgage, utilities, insurance, and other recurring bills. Add up all of your fixed expenses to determine your total monthly cost.
Discretionary spending is the amount of money you spend on non-essential items such as entertainment, dining out, shopping, and travel. To get an accurate picture of your total monthly expenses, add up your discretionary spending as well.
2. Define Your Reduced Discretionary Spending
In an emergency situation, it may be necessary to reduce your discretionary spending. To determine how much you could cut, think about what non-essential expenses you could eliminate or reduce if you were in trouble. This could include dining out, entertainment, and travel expenses. Calculate what a month of reduced discretionary spending would cost.
3. Identify New Costs from Loss of Income
In the event of a job loss or reduction in income, there may be new costs associated with this change. For example, if you are no longer covered by your employer's health insurance, you may need to purchase your own insurance. Calculate any new costs you may incur from loss of income.
4. Calculate Your Monthly Emergency Spending Budget
Now that you have defined your monthly expenses and reduced discretionary spending, as well as any new costs from loss of income, it's time to do some math. Add up the total for your fixed expenses, reduced discretionary spending, and new costs from loss of income to determine your monthly emergency spending budget.
5. Determine the Number of Months of Coverage
Next, determine how many months of coverage you want to have. A common recommendation is to have three to six months of expenses saved.
6. Calculate Your Emergency Savings Number
Finally, multiply your monthly emergency spending budget by the number of months of coverage you want to have. This is the amount of emergency cash you should keep in the bank.
Having an emergency fund is essential for managing financial emergencies. By following these six steps, you can determine the ideal amount of emergency cash to keep in your savings account. This personalized number will give you peace of mind and help you feel more secure in the face of unexpected events.