Three to six months’ worth of living expenses completes your emergency fund. The question now is: Should you go for three months’ worth or should you put in more? Only you can answer this question based on your job, your way of life, and the level of risk you are willing to take. If you have been with the same company for more than 15 years, for example, and are living a fairly good life (no major illnesses in the family, both spouses are working, etc.) then perhaps it’s safe to say that you have completed your emergency fund when you’ve put in three months’ worth of your living expenses in it. Government work is fairly stable compared to working for private companies so if you have no plans of quitting work for Uncle Sam then you could opt for the three-month rule as well.
However, if you are working on commission or are self-employed or are the sole breadwinner in the family, putting six months’ worth living expenses into your emergency fund would be prudent. The instability of commission-based income means that there will be times when there won’t be any cash flowing in. When you are on a single-income household, a higher emergency fund is recommended because any event that will mean a loss of that income can really cripple you financially.
Take note that the emergency fund is meant to be used for your expenses when you do not have any income flowing in yet. Thus, your calculation should be based on your monthly expenses, not your income. You dip into this to keep food on the table and pay for the utilities so you continue to have water and electricity. You do not use this to invest into your retirement while you are still weathering the financial storm.
So where can you find money for your emergency fund?
When you are already on the road towards financial fitness, you’d be surprised at the many avenues you can find to get the money you need to fully fund your rainy day savings. You can still sell stuff or work extra hours just to get that three-to-six months’ worth of living expenses together.
But remember the payments you used to make for your Debt Snowball? Well, now that you are totally debt-free except for your house, you can use the monies you used for your snowball and put those this time into your emergency fund.
It’s very important that every member in the family are into the entire plan, especially both spouses. As a couple, you should agree on anything about money. Secrets will not only ruin your budget, it will also destroy trust and cause problems in your relationship. Besides, once everyone is on the same page financially, you will serve as each other’s cheerleader and police. If one is feeling just how difficult staying on track is, the other can give that much-needed support and encouragement. If one is buying something that is not on the budget, the other can check and admonish.
Saving for your Own Home
When you are already at this stage—paid up all debts and already have an emergency fund—it is very tempting for those who are currently renting to buy a house of their own. Can you get that money for the downpayment from your emergency fund? Absolutely not!
Keep in mind that this fund is only for the rainy days. If you want to get a house of your own, you have to save for it. Let us repeat that: The money you should use for the downpayment should be saved up. Leave your emergency fund alone.
While a home is always a good investment, you should not rush into it. If you do, it will become another burden on you. If you save for a substantial downpayment, you get the advantage of having to make lower monthly payments in the course of the mortgage. However, if you are so eager to get a home with zero down, you will realize later on just how straining the monthly payments are on your budget. If you want to own a home, save for it first. By now, after doing your Debt Snowball and completing your emergency fund, you should already have sufficient experience getting the money together.
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