While financial experts argue that an emergency fund serves as a monetary buffer for unexpected costs, they often disagree about how much to set aside. Although a big savings fund can prevent you from going into debt if a bill comes up suddenly, there are some situations when a smaller emergency account makes more sense. According to Bankrate, you should have an emergency fund between three to six months’ worth of household expenses.
Here are three reasons to reconsider a big emergency savings fund:
- Too Much Outstanding Debt
How much you are able to comfortably save will likely depend on your income and debt levels. If you have a high debt-to-income ratio, you may want to prioritize paying off debt before saving for an emergency fund. A Bankrate survey found 24 percent of Americans had more in credit card charges than in their emergency fund. With the risk of going more into debt because of high credit card interest rates, you should consider diverting more money to pay for credit card debt than emergency savings.
- Lack of Debt
On the other end of the financial spectrum, if you do not have any debt, this may not necessitate an emergency fund, according to Lifehacker’s Two Cents blog. Look into your situation as to whether an emergency fund is essential if your income is enough to pay off all your debt, such as credit card balances, each month. You may have enough money left over after spending money on household bills to cover emergencies that may come up, such as a car repair bill and other costs.
- Income Comes from Several Streams
One of the main reasons why you would establish an emergency fund is to prepare you for major lifestyle changes that could impact your sources of income. For example, if you lose your job, an emergency fund would cover multiple months of expenses that would arise as you seek out employment. However, if you earn income from several sources, you may not have as much trouble with your bills if you lost a job, Lifehacker suggested. This depends on how much you receive each month. In addition to part-time or freelance jobs, determine if you have other sources of income, including disability or insurance payments, if there are other incidents.
Tips for Saving
Use an emergency savings calculator. Whether you want to follow the rule of thumb to save between three to six months of expenses, calculate how much you want to save using an emergency savings fund calculator. Using Bankrate’s calculator, input how much you have saved and the amount you expect to contribute to the fund each month.
Cut spending. In addition, evaluate your monthly budget and see if there are any spending areas that could be cut to make room for your savings fund. Ask yourself whether you could find a lower-cost alternative to everyday purchases or if there are services you no longer need month to month.