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How to Calculate Your Emergency Fund and Survival Number

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How to Calculate Your Emergency Fund and Survival Number - Dainty Dollar

When you first start budgeting, paying off debt, or attacking a huge money goal, it could feel as though you’re trying to do so much at once. Sort of like being in a sinking ship and trying to take out the water in bucket fulls. Stop.

Before you start paying off debt, saving money, or investing in the stock market let’s take a look at your emergency fund. On average the rule of thumb is that you should have 3-6 Months worth of living expenses stashed away for a rainy day. I’d like to go even further and have you ask yourself these four questions to help you decide how much you should have put away:

  1. How stable is your current job? (1 very, 2 moderate, 3 risky)
  2. Do others depend on your income? (3 yes, 2 somewhat, 1 no)
  3. If you were to lose your job, how long would it take you to find another job or replace your income? (1- two months, 2- three months , 3 – over 3 months)
  4. Without thinking much about it, what’s the first amount that you can think of that will give you peace of mind?

Answer honestly.

Now, grab another sheet of paper and begin jotting down your essential expenses. Essential expenses will be mortgage/rent, utilities, internet, cell phone, etc. Anything that is essential in your life during emergency mode will be listed here.

Now let’s figure out how many months you need to have stashed away.

Tally up the answers above, in parenthesis you’ll find a number system.

EXAMPLE:

In this example I’ll be assuming a role of a nurse with monthly living expenses of $1,500 a month during survival mode.

  1. How stable is your current job? 1 – very stable
  2. Do others depend on your income? 1 – no, no one depends on my income
  3. If you were to lose your job, how long would it take you to find another job or replace your income? 1 – two months to find a new hospital, go through the interview process and get hired. 
  4. Without thinking much about it, what’s the first amount that you can think of that will give you peace of mind? $6,000

 

 

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Tallying up the score above for questions 1-3 leaves me a score of 3. Therefore score of 3 means 3 months is what I should have in my emergency fund.

$1,500 x 3 months = $4,500

But now let’s add in question #4 into the equation. The amount that automatically gave me peace of mind was $6,000 so I can choose to either change the e-fund goal amount to $6,000 or take the average of the two numbers to find a sweet spot!

In this example I’m gonna do the latter so

$4,500 + $6,000 = $10,500

Now Divide $10,500 by two = $5,250  is what I should have set as the goal of my emergency fund + what gives me peace of mind (the sweet spot).

How many months is that ? $5,250 divided by your monthly expenses $1,500 = 3.5 months stashed away for a rainy day.

 

Now that you know how much you need to stash away for a rainy day, ask yourself how long you want it to take you. If you want to achieve this within 6 months, simply divide the total number by 6 and include the monthly amount in your budget.

This is one of the most important steps in your money journey, especially when you’re gonna focus on paying off debt and saving for a big goal. You don’t want any distractions or hiccups that will throw you off course!

 

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Valery Vargas

Valery Vargas

Valery is a 30 something millennial, Latina, entrepreneur at heart, first time mama, real estate investor, bookworm, board game enthusiast, and dreamer.

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