Do you have an emergency fund? What’s the definition of an emergency fund?
We’re often told that we need to save money for a rainy day. This doesn’t sound sexy at first because we all want to invest our money and take some risks. Putting money aside just in case seems boring. We don’t even know what an emergency fund is all about.
However, an emergency fund can really save you…
What’s up with emergency funds? Is there more to having an emergency fund then just saving money for a rainy day?
The other day an interesting topic came up in a discussion for my post on signs when you should quit your job. Loyal reader Trevor brought up the point of saving 6-12 months worth of living expenses before pursuing any business ventures. This was a good point because we need money to back us up when we take on some career risks.
You need money in the bank for whatever life throws at you and for whatever challenges you want to take on.
Then another loyal follower of Studenomics, Tom, asked about what someone should do if they don’t have 6 months worth of living expenses saved up. This brought up an interesting question for me:
How much money should a new graduate put towards an emergency fund? How much emergency fund money should I have?
I looked up emergency funds on Investopedia:
“What Is an Emergency Fund?
An emergency fund is a readily available source of assets to help people navigate financial dilemmas, such as the loss of a job, a debilitating illness, a major repair to home or car—not to mention the kind of major national crisis the coronavirus pandemic has created. The purpose of the fund is to improve financial security by creating a safety net of cash or other highly liquid assets that can be used to meet emergency expenses. It also reduces the need to either draw from high-interest debt options—such as credit cards or unsecured loans—or undermine your future security by tapping retirement funds.”
What’s my take on emergency funds for millennials?
To be perfectly honest I don’t have a clear answer to this question. I’ve been reading many personal finance blogs that constantly stress the importance of an emergency fund and various investment vehicles for these funds.
Most emergency funds state that you need at least 3 months worth of livings expenses for your whole family. Jeff Rose states that if you have a sales related job you should have 12 months working of living expenses in an emergency fund.
There’s no magical emergency fund calculator out there. I do know that we all should try to put some money aside for a rainy day. You should do your best to have some money ready just in case.
Here are some “just in case” scenarios:
- An accident.
- Money to quit your job.
- Any kind of unexpected expense.
Is there an answer to emergency funds in your 20s?
So this brings us back to the original question that I still can’t answer; how much money should a new graduate have in an emergency fund?
Yes I realize that I have not discussed the whole emergency fund at all on this blog so you should expect a few quality posts on emergency funds in the coming weeks.
Today I’ll provide you with key points so that YOU may determine how much money belongs in your emergency fund without using a special emergency fund calculator:
Are you planning on taking some risks? Does your situation appear to be safe for now?
If you plan on working the same job for many years to come then maybe you should focus on slowly building your emergency fund. If you’re someone that likes to take chances with their career or if you plan on pursuing new business ventures in the near future then you should definitely consider having a decent sized emergency fund so that you can budget properly for life.
How quickly can you bounce back from a failure?
If you’re the type of person that will take one giant chance, fail, and then sulk for the next year then you definitely need 12 months worth of living expenses saved up. If you have the ability to turn an obstacle into an opportunity or to bounce back from a failure immediately then maybe building an emergency fund shouldn’t be your main priority.
This is arguably the most important point to consider when working on your emergency fund.
How safe is your job? During a booming economy you could be working in finance making a fortune and laughing at the thought of an emergency fund. During a recession we must all consider the importance of an emergency fund, no matter how lucrative your current position may be.
Some industries are recession-proof while others collapse as soon as there is the slightest economic downturn. For the sake of your future, take a realistic look at your current position and ask yourself a few questions:
- Will I still be employed in a year from now?
- Is my job secure?
- Does my company have a history of firing people?
If you feel the answer is no to any of these, then I suggest becoming very aggressive with your emergency fund. Quitting your job is not an easy thing to do nor is it easy to bounce back when you lose your job.
How much do you need for your emergency fund?
Now it’s time to turn it over to the readers, how much is in your emergency fund?