This is what you should prepare your emergency fund for
Most people would agree that it is essential to have an emergency fund set aside for unexpected money sucking surprises that pop up from time to time. Findings from Bankrate.com showed that only 37% of Americans are able to cover a $500 to $1000 emergency expense, which is not even that much. There is a lack of education available to teach people how to save money and how much should realistically be put aside for emergencies. Whenever such questions are asked people are given lame responses like, "Emergency savings aren't usually measured in terms of dollars — rather, it's months of living expenses that money could cover.
For that reason, everyone will have a different dollar amount, and everyone will have a different need." Come on really? Someone came to you looking for advice and you're going to throw up a weaksauce answer like that? Others may just throw out erroneous numbers like $500 or $1,000 which are way under target, and those providing the answers can't even provide a good argument as to why those numbers were chosen. So today that's what we are going to do, help you understand what costs you need to should consider when building an emergency fund.
First up is Emergency Medical Expenses. There are lots of articles out there talking about how medical expenses have become the biggest cause for delinquencies, bad credit scores, and, heaven forbid, bankruptcies. First of all take a look at your medical insurance policy and understand the deductibles and co-pays. Depending on your insurance company they can range from $20 a visit to a few hundred dollars a visit. I grew up with a parent in the medical field and had my fair share of Emergency room visits through high school due to my after school job working construction. Nails through my feet, temporary blindness due to chemical burns, fingers power tool injuries, temporary paralysis, you get the point. Since my mom worked at the hospital my out of pocket cost for each of these events was always $5!
Then I became an adult with a corporate job and "great benefits." I always paid for the most expensive medical insurance policy my company had to offer thinking my visits would be cheap. For the first five years I never once had to visit the hospital, then one day I was having some pain in my ribs, so I went in for a check-up. Three months later I was surprised with a bill for $160 and was told that's what I had to pay after the insurance paid! A year later my spouse had a slight fainting spell due to dehydration on a hot day at the race track. The medics came and insisted on taking her to the hospital, that was literally across the street, by ambulance, even though she was feeling better after drinking some Gatorade. We entered the E.R., the doctor walked in and said, "well you look fine, want to stay or go home?" We left.
Our total time inside the hospital was less than 10 minutes. Two months later we received a hospital bill for $1,200, an ambulance bill for $400, and a bill from a random doctor we had never even heard of for another $350! "But we have insurance!" I cried. "Yes, you do! Congratulations! Your cost would have been $6,000 if you didn't!" said our insurance provider. Since that day I now keep a minimum of $2,000 in our Medical Expenses bank account at all times. I now work for a different employer and have even better health car with more reasonable deductibles, but I now keep $2,000 stashed away at all times for emergency expenses, because you never know where you may be when an emergency may strike and your preferred hospitals may not be immediately accessible. You could also ask cupid to find you a spouse in the medical field, and then you'll only need to keep $5 on hand!
Car accidents and car problems are often the other big surprise costs that always seem to occur at the most inconvenient time. A year into my career I bought I sweet used Audi A4 with 50,000 miles for $10,000. Over the next ten months that piece of crap broke down on me so many times I ended up blowing over $6,000 in ongoing repairs. I eventually crashed that car and it was written off as unrepairable. This was probably the best thing that ever happened to me. I got paid out the market value for the car, less my $500 deductible and then I bought a Toyota Prius went for over 267,000 miles just changing the oil and filters every 10,000 miles. Lesson two: figure out what your insurance deductible cost is and keep at least that much set aside in a savings account for unexpected repairs or a car accident. It is possible to lower your car insurance by taking on a higher deductible such as $1,000 or $1,500. The money you save by taking a higher deductible can be used to fund your emergency car expense fund.
BARE BONES COST OF LIVING:
Lastly, you should identify your absolute minimum cost of living and put away money to hold you over in case you lose your Job. The average time to find a new job is said to be between 6 and 7 weeks. Based on this information it would be best to set aside two months rent/mortgage payments, two months of utility expenses (gas, electricity, and internet), and two months of groceries. Assuming $2,000 for rent/mortgage, $150 for utilities and $240 per person for groceries based on my $2.67 per person per meal target, I would suggest putting aside $4,780 for an individual, $5,260 for a family of two, $5,742 for a family of three and $6,222 for a family of four.
So to recap, $2,000 for medical, $500 to $1,000 for vehicle and between $4,780 to $6,222 for 2 months of living expenses. That is roughly $8,000 for those of you who don't like math. This number could be higher or lower depending on your situation, for example, someone who owns a house may want to keep a few extra thousand on hand for an unexpected water-pipe break, or they may decide to use funds from one of the budgets we have already talked about to also cover these risks.I like using
I like using multiple banks accounts to set aside money for different purposes. I find it is easier to build up your savings quickly using this approach, rather than holding all of your money together in one account. Others may decide to put the money into easily liquidatable investments like a REIT that pays an 8% quarterly dividend like SNH or a Betterment robo-investment account. The choice is up to you.
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