Diva Zone ™ Magazine Power Couples February 2018 - Teaser Issue | Page 8

8
WHAT SIZE IS YOUR EMERGENCY FUND?
By Javis M. Brunson - Financial Editor
your job. It ’s there to
give you some time to
make the necessar y
adjustments when a
gap develops bet ween
income and expenses.
Factors in
Calculating An
Emergency Fund
If you were to ask a room filled of financial
advisors how much income you should
have in your emergenc y fund, you would
usually get a response of 3 to 6 months’
income. On the other hand, I would state
that your emergenc y fund needs to be
based on your spending, not your income.
The t ypical 3 to 6 months’ spending
response can be a subjective amount.
Here are a few tips on sizing your
emergenc y fund.
Purpose of An Emergency Fund
One of the basic purposes of an emergenc y
fund is to cushion the blow if you lose
Reasons Not To Have
An Emergency Fund
1. You’re broke or deep, deep, deep
in debt. If you have installment
debt, the interest rate you could
get on your emergency fund will
almost certainly be far less than
what you’re paying on your debt.
Even in that case, you probably
want to have an emergency fund
An emergenc y fund is wor th having, even
if your job is ver y secure. There are all
sor ts of other minor emergencies that can
cause a problem for someone who doesn’t
have a ready source of emergenc y cash, a
miscalculation in a check register leaving
insuf ficient funds, a payroll error by your
employer leading to an underpayment,
a call from a relative tr ying to scrape
together bail money.
The basic factor in
the calculation is one
month’s
minimum
expenses.
• Minimum monthly
bills Review all your
bills that are necessar y
to live, or that you
are
contractually
obligated to pay: rent
or mor tgage, utilities, car payment,
other debt payments, etc. Depending on
contract terms, you may have monthly
bills that could be canceled on a month’s
notice or less- -cable T V, fitness club
membership, and so on.
• Routine monthly expenses This
includes groceries, gas for the car, cost
of prescriptions beyond what insurance
covers, etc.
• Job -hunting expenses Be sure to
include all the expenses that you’d need
to suppor t a job search- -your phone bill,
internet access, enough money for gas (or
greater than zero, if only to carr y
you over the minor glitches like a
holiday weekend delaying access to
your paycheck. An emergency fund
of one month’s minimum expenses
might be a reasonable target.
2 . You’re investing for a better
return. If you’re getting great
returns in your stock portfolio, it
can seem stupid to have several
An emergenc y fund can also be used to
take advantage of oppor tunities, both
big (a business deal you’ve been tr ying to
close for weeks is suddenly available- -but
only if you show up with a cashier ’s check
by 5:00 PM) and small (a chance to stock
up on tomato paste at 50% of f ).
When
calculating
your
emergenc y
fund consider your minimum monthly
expenses times at least three months,
bus tokens) to get to job inter views, dr y
cleaning for inter view clothing, etc.
• Other mandatory expenses This would
be tuition, taxes, insurance payments
(monthly share for annual expenses), etc.
Total the above and this should give you
rock-bot tom expenses for one month.
Why 3 to 6 Months
Emergency Fund?
The 3 to 6 months timeframe has to do
with how long it can possibly take to find
a job and how long it can possibly take to
make the necessar y adjustments if you
couldn’t find another job. Three months
is barely enough, because it ’s not unusual
for it to take a month or t wo to find a new
job. Af ter three months of looking and
not finding a new job would you sense
you’re facing serious dif ficult y? Having
an additional three months of emergenc y
funds will be ver y comfor ting while you
continue your job search.
Where to Stash Your
Emergency Fund
Consider placing par t of your emergenc y
fund in your local bank. There are times
when even one or t wo extra days to move
the money could cost you a lot. Any of
the usual suspects: savings account,
money market account, internet savings
account, money market mutual fund can
be utilized.
thousand dollars sitting around
earning 1.5%. It ’s a matter of trade
offs, the hypothetical lost return
on a few thousand dollars on the
one hand, versus the value of an
emergency fund that ’s there when
you need it on the other. Up to six
months’ minimum expenses, I think
the advantages of an emergency
fund outweigh the potential lost
investment return.
and preferably six months, and keep it
to be stashed where you can get at least
a large fraction of within one business
day. It ’s one of the basic rules of personal
finance for good reasons.