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How To Determine The Appropriate Amount Of An Emergency+Fund

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The easy answer is to keep at least three months of expenses in an Emergency+Fund. The answer that fits your particular life is more complex. For some people, the Emergency+Fund should be up to 12 months of expenses.

The following factors can help guide you to the best amount to set as a goal. When thinking of your expenses with respect to the number of months of expenses to keep, do not include taxes. 

Your health status

All else considered, the less stable your health condition, the larger Emergency+Fund you should consider.

The current status of treatments for your health situation

If your situation fits within the norm for your health condition and the current treatments are successful for most people, your need to have money for a new or foreign drug or treatment may be limited. On the other hand, if there are few treatments and success rates are low, a larger amount is indicated.

If you do not have insurance, these costs become very important.

High-interest rate debt

If you have debt with a high-interest rate, consider paying off that debt instead of starting or maintaining an Emergency+Fund. However, retain at least some cash if:

  • Your statistical life expectancy is less than two years.
  • You don't have access to enough credit that you could use in an emergency or period of reduced income.
  • You are uncomfortable not having cash available to fall back on.

Your access to credit

Although it is best NOT to use credit as a replacement for an Emergency+Fund, your access to credit might influence how large a fund to keep. For example, if you have access to a large amount of credit you might only keep a three-month emergency fund since you'll be able to charge emergency purchases or use credit to pay for your living expenses if your income is decreased for an extended period of time.

How comfortable you are with risk

Some people would rather not keep their savings in investments that do not earn much money, such as money market funds. However, please keep in mind that, as a general matter, the higher the investment return, the higher the risk. The prospect of a higher return doesn't do you any good if all or part of the amount you invest is lost.

Keep in mind that while the stock market may provide a higher return over time than safer investments, you may not have the luxury of waiting to access the money in your Emergency+Fund until an investment takes an up turn. 

Your insurance

In general, the more insurance you have, the smaller an Emergency+Fund you may need.

  • If you have disability insurance and are covered by unemployment insurance, you may not need as large an emergency fund. If you were to lose your income from work, these coverages would at least partially replace the lost income.
  • If you have credit insurance on any loans or credit card balances you owe, you also might not need as large an emergency fund as if you did not have these coverages.
  • If you have a $1,000 deductible on your automobile or home insurance, you might need more of an emergency fund than someone who has, say a $250 deductible.
  • If you have no or poor health insurance, consider aiming for a fund equal to as much as twelve months' expenses.

The security of your employment and the current job market

If you are working and your job is very secure, you might not need as large an emergency fund as someone who works in a declining industry or an industry with a lot of turnover. If you do a very specific job, and there aren't a lot of jobs like yours in the country, you may need 12 months or so to find a new job.

Your income source

How dependent are you upon one income source? If all of your income comes from one place, such as a job, you'll probably need a larger emergency fund than someone whose income comes from a mixture of sources such as alimony, investments, rental income, and a job.

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