How much reserve money you really need right now?
Determine How Much You Need
How much is enough? Your reserve goal should actually change as your life and the world around you change. If our current economy has taught us anything, it’s that we can’t know what may be right around the corner. So think of your emergency savings as a moving target that should be reevaluated a couple times per year.
The first step is to accurately figure your monthly living expenses. These are the essentials such as housing, utilities, insurance, food, loan payments, transportation, etc. Add up all your current financial needs and obligations for yourself, your family, and to third parties that you couldn’t or wouldn’t want to cut if your income was seriously reduced.
The second step is to estimate for how long you could potentially need your emergency money. I recommend saving no less than six months’ worth of living expenses. But your unique situation might call for considerably more or less savings. Here are some tips to help you determine how much you should set aside:
Be realistic about the stability of your household income. Do you or your spouse work in an industry with volatile consumer demand or one that’s already been steadily declining? If so, this should prompt you to consider saving more than six months of living expenses.
Add a safety buffer. Consider adding an additional 10% to your calculated monthly expenses. This will give you confidence that you’ll have enough for job hunting expenses or other surprises that you may have forgotten to estimate.
Don’t count on selling stuff. When times get tough, it can be difficult to sell possessions, especially if you need the money quickly. So cash is king for your reserve fund.