No matter your source of income, no matter how often (or rarely) you get paid, no matter how stable your job is, each should have a reserve fund.
An emergency fund can be used to cover your basic living expenses when your income has dwindled or even disappeared. However, the amount of money someone must have in their emergency fund varies depending on a number of factors.
For those in a paid position with a fairly stable job, financial experts recommend saving three months on basic living expenses. However, those with less stable jobs or people with variable incomes should be a little more conservative with their savings. Experts recommend six months of spending.
Our reserve fund calculator will help you determine the number of months of spending, as well as the total amount you should be kept in your reserve fund.
How to use the reserve fund calculator
The reserve fund calculator helps you determine how many months of expenses you should have set aside for unexpected events. To calculate the specific value of your reserve fund, the calculator asks three questions about your income and expenses.
Average monthly expenses This is the amount you spend each month on essentials like rent/mortgage, utilities, groceries, gas, and the like. You can also include less important purchases like subscription services and eating out, but the focus should be on the expenses you need to stay afloat.
Existing Liquid Savings − This refers to the amount of money you have already saved up and are ready to use if you lose your job. This number does not include your retirement savings because withdrawing money from your retirement account has tax implications.
How difficult would it be to replace your existing income? — For this question, you can choose one of the following four answers, but be sure to rate conservatively:
- Easy (3 months) – “I could quickly find another job with the same pay.”
- Medium (6 months) — “I am well qualified for many professions, but I understand that it may take time to find a new one.”
- Complex (9 months) — “Work in my field and salary levels are limited or competitive.”
- Very difficult (12 months) – “I lack the necessary skills for the job market, or I work in an industry that takes a long time to find a new position with comparable pay.”
After you answer these three questions, the calculator will estimate the amount of money you should have set aside in your emergency fund. In particular, the calculator offers two sums:
- The amount needed to cover this time is This is the total amount offered for your emergency fund, based on your monthly expenses and the number of months it will take you to find a new source of income.
- The amount you need to save to cover expenses if you lose your job − This number is based on your existing liquid holdings. This is how much money you need to put aside to bring your current savings up to “the amount needed to cover this time”, the total amount offered for your reserve fund.
Why is a reserve fund needed?
It’s no secret that the American economy has suffered in recent years. The Federal Reserve is hard at work fighting inflation, but their efforts are having painful consequences, including the threat of more than a million additional unemployed Americans in the coming year.
In today’s financial climate, a full reserve fund is essential, but it can do much more than just cover expenses in case your income is interrupted. Here are some examples:
- Large, unexpected and uncovered medical expenses
- Overhaul of a car (the cost of which reaches several thousand dollars)
- Help a friend or family member in an emergency
- Facing an unexpected legal entanglement that will require you to pay your lawyer up front
- Sudden and unexpected need to travel, possibly to care for a sick family member.
- Major home repairs that are not covered by homeowner’s insurance or when insurance reimbursement is seriously delayed
- An identity theft situation that causes you to lose access to your lines of credit
- You receive a notice from the IRS informing you that you owe several thousand dollars in taxes.
Summary
A well-stocked emergency fund should be able to supplement your monthly income for a set period of time—usually three to six months—if you suddenly lose your job. However, even if your career is relatively stable, you should still have an emergency fund.
No one is immune from unexpected expenses. You’ve blown a tire. Your water heater is out of order. Your dog is eating chocolate cake. Unforeseen expenses crop up all the time, so everyone needs an emergency fund to fall back on.
Our reserve fund calculator can help you determine how much money you should be saved for future contingencies.
