How Much Savings Should You Keep for Emergencies?
Savings are an essential part of a person's financial planning and stability. It can be the difference between peace of mind, and stressed-out sleepless nights.
The question of how much one should save can be a bit tricky, as it depends on several factors that are unique to each individual. In general, a good guideline is to aim for three to six months' worth of monthly expenses saved in an emergency fund. However, this guideline is not set in stone, as there are several factors that you should consider before setting an amount of savings you want to have. In this article, we will look at some of the factors that should be considered when determining how much to save.
Job security is one of the most important factors to consider when determining how much to save. If you have a stable job with a strong track record, then having three to six months of savings should be sufficient. However, if you are in an industry that is prone to layoffs, pay varies depending on the project, in a niche industry, or run your own business, then you may want to aim for more, up to a year's worth of expenses.
Another factor to consider is how easy it is to get a new job. If you live in an area with a strong job market and a high demand for your skills, then you may be able to find a new job relatively quickly in the event of a layoff. On the other hand, if you live in an area with a weak job market or if your skills are not in high demand, then it may take you longer to find a new job. In such cases, you may want to aim for a higher level of savings to provide a cushion while you look for a new job.
Dependents are another factor that can influence the amount of savings you need. If you have dependents, such as children, a partner, or elderly parents, then you may want to aim for a higher level of savings. This is because you will need to support not only yourself but also your dependents in the event of a layoff or unexpected expense. You may be able to cut down your spending in an emergency, but they may have fixed costs that are essential. Additionally, if you have dependents who have special needs, such as a child with a disability, then you may need to save even more to ensure that you can meet their needs in the event of a financial emergency.
Questions to ask yourself:
If I lost my job tomorrow, how long would it take to get a new job that pays at least roughly the same as my current job?
Would my savings be able to cover that gap?
Would my family’s quality of life drop if I was out of a job for 3 months?
Would losing my job put on additional financial stress on myself or my family?
Are there any big emergency expenses that I haven’t considered (car repairs, home repairs, health emergency costs, etc)?
How do I feel about my current level of emergency fund savings?
The goal with your emergency is to feel good about handling any emergencies life throws our way. We don’t want to feel stressed about our financial situation. If we lose our job, we want to feel safe, knowing we have enough money saved to take our time with our job search. This helps us not get desperate and take a job we shouldn’t. Which allows us the space to be patient and wait for the right opportunity, which will pay dividends in the future.
In conclusion, the amount of savings a person should have depends on several factors, including job security, ease of finding a new job, and the presence of dependents. While the general guideline is three to six months' worth of expenses, this is not a one-size-fits-all answer. It is important to consider your own unique situation and the factors that may impact your financial stability when determining how much to save. By taking the time to assess your own situation and make a plan, you can ensure that you have the savings you need to weather any financial storm that may come your way.
