One of the biggest problems and sources of stress Americans face today is not having sufficient cash reserves for unexpected life events. It is reported that a startling 76% of Americans are living paycheck-to-paycheck. Most Americans do not plan for losing their job, unexpected medical bills or a major automobile expense and quite honestly, I understand why. It’s not a fun thing to think about and planning for today is much easier than planning for tomorrow. By not preparing for these unpredictable life events, you are doing a huge disservice to yourself and also adding (avoidable) stress to your life.
So how much cash should you keep in your emergency fund? I would recommend having enough cash that would last you 12-18 months should you lose your job. Six months worth is acceptable but trust me, you will sleep better at night knowing that you have more cash in reserves should something catastrophic happen. That’s been my experience at least. I was recently diagnosed with an extremely rare eye disease which forced me to take a month off work. The cash I had in reserves gave me a huge amount of comfort, and instead of stressing about bills, I was able to concentrate on recovering.
When going through your expenses to calculate the cash you need to set aside for your emergency fund, include only your basic necessities. Here’s a simple example of how to calculate what you need in your emergency savings account:
With $1,600 of fixed monthly expenses, your goal for your emergency cash reserves should be $19,200. This might seem daunting, and it will certainly take some time to get there, but I promise you, you will be a lot less stressed about your money situation. Additionally, should you lose your source of income, or be hit with a sudden injury or illness, you won’t be forced into taking a lower paying job or a job you are not passionate about. You will have the luxury of being patient and selective with your job search because you know you will not have to worry about paying your bills.
You may be hesitant to take chunks out of your paycheck for your emergency fund, and that’s totally normal, but you cannot put a value on having peace of mind because peace of mind is priceless.