Emergency Funds: What and How Much You Need
For sure, you have read about how to start building an emergency fund; this time, let’s talk about what you need to build it and how much money you can put in as well as what it covers.
Emergency Fund – A Good Start
Several people favor starting an emergency fund states that it should worth around three to six months of expenses. However, if you’re just beginning to build one, this might be a grandiose goal for you.
Instead, you can start with small amounts and choose between $500 and $1,000. If you can afford $1,000, this is a good figure to cover most of the possible small emergencies that are likely to happen. As soon as you build one, you can advance your mindset on the framework of your full emergency fund.
Full Emergency Fund – What it Covers?
This time, we’re getting into a more interesting yet complicated step to figure out what your full emergency fund covers. Now, assuming that you’re taking the 6 months’ worth of your income.
Some may perceive it that it’s a must to take your earnings for the whole month and multiply it into six. However, if you are to consider certain circumstances like losing a job, you won’t get the exact amount of your expenses.
Options in Setting Your Six Months Target
In setting your target, you might need to come up with various options that will intend to cover your full emergency fund. A few of the options that you might consider are as follows:
Option A: Funding The Lifestyle
Funding your lifestyle is an option to prefer if you wish to sustain your lifestyle despite the circumstances of losing your job. This will mean that you can keep up the usual lifestyle that you normally live adapt regardless if you lose your job.
In this option, you are allocating your full emergency fund on sustaining the entertainment you usually had, the food that you’re used to, and the usual way of going on a trip or vacation, as well as buying the same stuff that you basically do. For most, this is similar to how you’re salary looks like, unless you have saved a significant amount of your income every month.
Option B: Covering Only The Necessities
Funding only your needs means calculating the amount that you need to suffice the essential expenses while considering major cutbacks to the other expenses.
In this option, you will have to decide for hard choices mostly in your lifestyle or living standards since your full emergency fund only covers the necessities. For instance, you can cancel your cable subscription or cell phone plan as it may not equate to the things that you need.
Now, when taking into an assumption that we can trim certain areas in your life, but not to the point of reaping you which might lead to restoring your life back once the circumstances has passed.
Step 1: List Down All Your Expenses
It is ideal that you create a budget with figures on each category. If you haven’t created one, you might need to consolidate all your bills and start calculating the monthly figures of each expenses every month.
Step 2: Cutting Back
This time, you have to decide the expenses that you can reduce or eliminate. Most of these expenses are your must-haves which are as something that you can live without or something that is considered as wants. For instance, buying food outside or ordering for dinner instead of cooking home cook meals that are way cheaper and healthy.
Moreover, if not eliminated you either reduce the amount or find an alternatives to these expenses. A more commendable means to compensate this cutbacks are slowly setting a small portion aside to rebuild it. This way, saving slowly such small amounts allows you to minimally continue the lifestyle that you used to have.
Step 3: Sum It Up
As soon as you’ve eliminated or reduced the unnecessary expenses, you’ll be left with the essential ones. You can get the sum of these essential expenses and multiply the total sum by six. This will give you the value of your expenses for 6 months. The result will then be the worth of savings that you are to allocate for your emergency fund.
If you haven’t attempted to save some funds in your account, the desire to spend massively is likely possible. Might be that running out of brandy during a night out will deemed as “an emergency”, making you sacrifice your saved funds which is supposed to be intended for matters that are truly considered as an emergency.
Besides, it is important for someone to fully understand and determine what is considered as an emergency. This is to avoid utilizing your fund into something that’s not actually an emergency.
Moreover, after saving such amount, it will give you more enthusiasm to save for other things such as a your retirement. You can even save for a small regular amounts for things that you wanted. The bottom line is, regardless of how you set up things and design your plan, your emergency fund should strictly be off limits from things that are not worth spending. Should you want one, it shouldn’t be treated similarly as your personal account.
CONSUMER PROPOSAL EXAMPLE
Example Unsecured Debts
|2||Credit card 1||$6,812|
Your Monthly Repayments Would Be
a Consumer proposal $748
(total contractual repayments)
a Consumer proposal $295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances.