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In New Mexico, we have a state question! “Red or green?”. This refers to the type of chili you would like in your meal. If you’re wondering, my answer is green, every time! But the more important question should be “3 months or 6?”.
We often hear that your emergency fund should cover 3-6 months of expenses, but how do you know if you should have 3 months, 6 months, or somewhere in between? 3-6 months can be drastically different and have different implications for how far you can weather an emergency. Let’s take a look at how Your Money Line would help you determine the “right” amount for you.
Step 1: Awareness
Emergency funds are a savings bucket intended for those moments you couldn’t anticipate: car repairs, a broken hot water heater, major medical events, even unemployment. It starts with recognizing the need for an emergency fund — the first step is simply becoming aware of these potential financial risks.
Step 2: Understanding
When you begin calculating the possible range for your emergency fund, you will want to grasp what your monthly expenses are fully. For instance, if your monthly expenses are $5,000, at the bare minimum, you should have $15,000 saved up. Understanding your expenses allows you to tailor your emergency fund to your specific lifestyle and needs.
Step 3: Determination
Decide how much you actually need based on a thorough evaluation of your financial situation. This might include considering your job stability, the predictability of your income, the condition of your home, and any dependents' needs. Determination is setting a course for how much you aim to save — whether closer to three months for fewer uncertainties or six months for a more complex financial situation.
Step 4: Action
Take practical steps toward achieving your emergency fund goal. This could involve setting up automatic transfers into a savings account specifically for emergencies or cutting back on non-essential expenses to funnel more money into this fund.
Step 5: Strengthening
Once your emergency fund reaches a sufficient level, continue reinforcing your saving habits. Review and adjust the fund as your financial situation changes, such as after a major life event or if your expenses increase or decrease. This step is crucial for ensuring that your emergency fund remains robust and responsive to your needs.
Step 6: Confidence
Achieving your emergency fund goal will bring a sense of financial security and empowerment. Having this fund in place lets you face potential financial challenges with confidence, knowing you are prepared for unexpected expenses.
Keep the Momentum Rolling
Remember, determining the size of your emergency fund isn’t a one-size-fits-all situation. Everyone’s circumstances are unique, and what’s right for one person may not be right for another. Use these steps as a guide to think critically about your own financial needs.
Don’t Do It Alone
Our dedicated Financial Guides are here to help employees through each step of this process. From gaining awareness to building confidence, we assist in setting clear goals, taking actionable steps, and ultimately feeling more secure in your financial decisions.
