Throughout our blogs you will find references to an emergency fund – something that can help you out in unexpected situations. This includes things like an unexpected medical event, an urgent need to travel or fixing a leaking roof.
How much should you have in your emergency fund?
There are many methods to determine how much cash you need in your emergency fund. The choice is yours and it really depends on your comfort levels.
Here’s a few common methods you could use:
- One months net income – to replace your income for one month should you have unexpected time off work
- Three months worth of loan repayments or rent plus bare minimum living expenses (like groceries and bills)
- $5,000 for a single and $10,000 for a couple
Determining how much you need really comes down to the type of scenario you would need to access the funds and how comfortable you are with uncertainty.
For example, if you were to require the money for an unexpected medical event but you have a large sick leave balance at work – you may be comfortable with less in savings. The problem with this, however, is you can’t predict what potential emergency may arise (although we hope it never does!).
What would you use your emergency account for?
No one likes a negative nelly and it’s not fun to think of the *worst case scenario*, however, bad stuff does happen and being under financial stress during a difficult time is not the position you want to be in.
Murphy’s law will mean you are unlikely to have an event happen for quite some time – and the temptation to use your emergency fund on a trip to Europe will be real.
Amongst the team at Kernel, we’ve had to access emergency savings in the following situations:
- Waking up with a toothache resulting in a costly trip to the dentist (and a $5K solution)
- Time off work for a small medical procedure that cost a cool $6k out of pocket
- Car engine blowing up between Hamilton and Auckland and being quite stranded
- A very expensive trip to the Vet to save the life of a cute kitty
- Unexpected death in the family that required international travel
When something does happen, can you really put a price on the comfort of knowing you can make whatever you need to happen, and you won’t end up in debt at the end of it?
Whatever number you land on, make sure you always keep this separated from your daily spending. It should be accessible, but not too accessible.
