The emergency fund is a tool, in my opinion, essential to have fully controlled personal finance and to sleep comfortably at night. Futher reading at http://thearcmarion.org
However, the issue of how much an emergency fund should have is something else and there are different opinions.
For me, at least one year in an emergency fund is almost indispensable. And depending on the employment situation, family and economic can be even more.
Although on the other hand, I think that more than two years of expenses in an emergency fund is too much. It would be an important opportunity cost.
How much money do you have to have in the Emergency Fund?
Normally, the number of family members is usually used as a guide to know the appropriate amount , but that does not work on many occasions either.
A single person may need an emergency fund greater than or equal to a family of 4, if their economic and employment status is much worse than that of the family . It’s weird, yes, but there may be cases. And I also want to give this problem another perspective.
A quick way to establish how much your emergency fund should have is to think about the worst possible situation you can imagine . Car breakdown, job loss, etc.
Add an additional 20% in case you failed the calculations and that should be your goal for your emergency fund . Ideally, your emergency fund be able to cushion that situation without problems.
The right amount is one that makes you feel safe, after considering the most catastrophic scenario possible.
This brings us back to the idea that personal finance has more of ” personal ” than ” finance .” Something that I have repeated many times.
I think it makes perfect sense to calculate what could be the worst possible scenario in detail. And determine what the cost would be and what actions you would take to minimize it. Always keeping in mind that the worst possible scenario is different for each type of person.
It is important that this scenario be realistic
Don’t overdo it, it’s complicated for 3-4 misfortunes to happen at once. That your car breaks down, they kick you out of work and your partner too and it turns out one of your children is detected a disease that does not cover social security. By power, it can happen. But the possibilities are minimal.
However, some of those cases, if they can happen and therefore, you must have an emergency fund of the appropriate size.
Another great piece to consider is your values
And the way you live your life . If you are a person who believes that you have to be self-sufficient and carry out prior financial planning, then your emergency fund may be bigger, although precisely because of that, you have better personal finances.
However, as I say, the key is an amount that makes you sleep soundly at night.
When defining the size of your emergency fund, be sure to look for not only the worst case scenario but also your way of looking at life and your personal values.
There is no magic formula that tells you how much your emergency fund should be. This is one of the things that you must decide for yourself.