Dave Ramsey and Suze Orman may have a difference of opinion regarding various financial matters but both of them unanimously accept the importance of an emergency fund in our lives.
An emergency fund helps you to take care of your pressing financial issues without getting into debt. Even when you’re in debt, an emergency fund helps you to renovate your home comfortably without affecting your credit card debt settlement. You can set aside a portion of your monthly income for settling your credit card debts and use your fund for the home renovation. Such is the importance of an emergency fund.
How much should you save in your emergency fund?
An emergency fund is a must especially when you’re trying to get your financial house in order. But how much should you save in your emergency fund? Should you save 3 to 6 months’ worth of expenses or even more? Let’s find out.
- A basic emergency fund: A basic emergency fund should have 3 months of your living expenses. This implies if you need $4000 per month for covering your basic needs (food, clothes, mortgage, utilities, etc.), then you have to keep $12,000 in your emergency fund.
- A moderate emergency fund: Are you the sole bread earner of the family? If so, then you have to save a minimum of 6 months’ worth of expenses. If you work in the stock market where there is high volatility, then you should try to save double the amount in your emergency fund. If your job has a high injury rate, then also you should save more in your emergency fund.
- The best emergency fund: When you’re good at saving money and want to achieve your long-term financial goals, you should keep 12 months worth of living expenses in your emergency fund. This is the minimum amount you should keep in your emergency fund. If your monthly income is high, then keep $100,000 in your emergency fund.
Suze Orman – What is her opinion regarding emergency fund?
The financial expert and former CNBC television host Suze Orman feels that keeping 3 to 6 months’ worth of expenses in an emergency fund is not enough. Someone might stay unemployed for a year. Someone might be bedridden for several months. How will he survive for 12 months? Several things can happen during this period and exhaust the emergency fund. So it’s better to keep a minimum of 8 to 12 months’ of living expenses in the emergency fund.
In a recent interview, Suze Orman said,
“Go back to 2007… You lost your job, you lost everything, you were working on this tech thing and all the startups went down. Nobody had any money to invest, nobody wanted to touch anything, nobody wanted to IPO because the markets were going down and you couldn’t find anything to do. Think it took you just three months to find another job? Think it took you six months to find another job?”
“It’s not just about the economy. What if you get sick? What if you’re hit by a car? What if something happens crazy in this world? We live in the craziest world I’ve ever seen in my life right now. And the only way you can take craziness out of that if for you to make yourself secure.”
The best way to have a secured financial future is to create a fat emergency fund.
A golden rule for building an emergency fund
You got to stop overspending money if you’re serious about building an emergency fund. A dinner at an expensive restaurant with your date may sound romantic but it isn’t a financially wise move. Consider having a romantic dinner at a nice cafe instead to save money.
How to stay motivated to save
Sometimes, you need the motivation to save a lot of money. In such a situation, you can talk to a friend who is good at planning and saving money. He can help you stay motivated. Still, if you need more motivation, then check out the reasons to build a well-padded emergency fund here:
- An emergency fund helps you survive after a job loss
- It helps you take care of family emergencies quite well
- It helps to make your stress-free
- It helps you to do major home renovation
- It helps to avoid marital arguments
- It allows you to pursue attractive investment opportunities
Keep as much money as you can in your bank account. That would help you feel financially secure. To get started, work on your budget first. Take your time and analyze your budget carefully. Find out the areas where you’re spending unnecessarily. Check out the areas where you can save money. Invest wisely so that you can reap hefty profits from the compounding interests.
Don’t rely on credit cards. Of course, credit cards can help you cover your emergency expenses. But you need to remember this fact that credit cards have hidden expenses. You have to clear the entire balance and pay additional interests also.
Additionally, I would also ask you to stay away from payday loans. In a recent survey, it has been found that 51% of millennial’s borrow payday loans to cover their unforeseen expenses. But that is again a bad financial move. Payday loan companies charge above 400% interest on the loans. Honestly speaking, it’s almost impossible to pay off these loans at such a high-interest rate, and this single factor pushes people towards debt.
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- How Much Money Should You Keep In Your Emergency Fund? - October 22, 2018