Last month, Chelsea commented on my post about my savings goals for 2014 and asked a question I honestly can’t believe I’ve never answered before: Why $10,000 in an Emergency Fund?
The short answer is fairly simple: $10,000 is approximately six months’ worth of essential living expenses for me; that means no restaurant budget, no shopping budget, etc. – just the essentials that need to be paid in order to live and eat. Why six months? Is it lame if I say because that’s what personal finance experts suggest? Well, they do… so I’m listening.
To come up with the $10,000 answer, I simply took one of my regular monthly budgets and stripped out everything I wouldn’t need in the event that I lost my job. If I was unemployed, I’d cut out my restaurant budget, any shopping or entertainment, charitable donations and even savings. What I would end up with is a budget that looked like this:
So, technically I should save closer to $11,000… and if I ever reach $10,000, I’ll probably top it up. But an even $10,000 seemed like a good goal to start with. As I mentioned, I’m saving it in a TFSA with ING, which is only earning 1.40%, but because it’s cash I would want available in an emergency, I am not comfortable investing it in mutual funds or stocks. So, I’ll likely keep it there forever. Or, you know… until I need some of it. Which, I suppose, leads me to answering one last question: What constitutes as an emergency?
In my eyes, basically anything that would require an immediate fix. For example, my cars’ 5-year warranty is almost up, so any breakdowns could require costly repairs. If I got a dog one day and it got sick, an unexpected visit to the animal hospital could add up quickly. These are just two examples of things I wouldn’t want to wait until I could save up the cash to deal with – the urgency then making it an emergency.
Of course, the possibility of losing my job and facing unemployment, or getting sick and needing to take time off, are the two biggest reasons I’m saving so much cash; either would be a true emergency – one I hope to never face. (*Knocks on all the wood*)
Do you have an Emergency Fund? How did you calculate the amount you wanted to save?