We’ve often talked about how an Emergency Fund should be your starting point for investing and also how to create one. But how much money should one have in their Emergency Fund??
A good thumb rule is to have 6 months of expenses as an emergency fund amount. But like all rules of thumb, this doesn’t work perfectly for everyone. While this is a good amount, If you want to do an even better job, consider these 3 factors:
#1. The nature of your income
Do you work as a freelancer and your income is irregular or do you have a regular job with a regular pay cheque?
If your income is irregular it makes sense to have a larger emergency fund because you can’t be sure when you get the money. This means that your emergency fund amount might need to be greater than required to cater to expenses for six months. We would suggest 12 months.
#2. The nature of your job
Do you work in a stable job in an industry with very low chances of being laid off? Or do you work in bold new companies where the rewards are high but so are the risks?
If you work in startups and younger companies which are still finding their feet, go with a larger emergency fund as the risk of the company facing tough times may be higher versus working in large well-established firms.
#3. Whether you are married or if you have dependents
As a single person or when your parents don’t depend on you for their financial needs, your finances are only going towards meeting your needs and thus your emergency fund should cater to those needs only.
As a married individual, however, the emergency fund is ideally a joint fund where both spouses contribute depending on whether both are financial contributors. Such an emergency fund needs to cater for the needs of both spouses as well as children if they have them, and thus needs to be bigger.
Similarly, if your parents depend on you financially then the emergency fund needs to cater to their needs as well.
Note: Based on the 3 points above, your emergency fund can be more than 6 months of expenses but never less.