Explore the factors that influence the ideal emergency fund size in our latest article. From the basic rule of thumb to personal considerations, we help you determine the right cushion for unexpected financial setbacks.
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“Interested to hear people’s views on emergency funds. Wanting to know how much I should be putting aside in an offset vs investing.
Do you apply a formula? Eg. Cash flow after debt servicing/bills x months x household members?“
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Hi there! When it comes to determining the appropriate amount for an emergency fund, there is no one-size-fits-all answer. Factors such as individual circumstances, financial goals, and risk tolerance should be taken into consideration. Fortunately, there are some general guidelines and methods that can be helpful in this regard.
Basic Rule of Thumb:
Many financial advisors recommend having three to six months’ worth of living expenses in your emergency fund. This can help cover essential costs such as rent/mortgage, utilities, groceries, insurance, and other basic needs in case of unexpected financial setbacks like job loss or medical expenses.
Personal Factors:
Your personal circumstances will play a significant role in determining the appropriate amount. Factors like job stability, health, and family situation can influence your emergency fund needs. For example, a single person with a stable job might be comfortable with a smaller fund, while a family with dependents and variable income might prefer a larger one.
Consider Your Expenses:
Calculate your monthly expenses, including bills, groceries, insurance, debt payments, and any other essential costs. Multiply this figure by the number of months you’re comfortable having as a financial cushion. This could be anywhere from 3 to 12 months or more, depending on your risk tolerance.
Account for Special Circumstances:
If you have specific risks or circumstances, such as an unstable job or a higher likelihood of unexpected expenses (e.g., health issues), you may want to save more in your emergency fund.
Offset vs. Investing:
It’s common to keep your emergency fund in a savings account or another easily accessible, low-risk account. An offset account can also serve this purpose, as it effectively reduces your outstanding debt, but it might not be as liquid as a regular savings account. Investing your emergency fund is generally not recommended because it involves more risk, and you might need to sell assets at a loss in an emergency.
Reevaluate Periodically:
It’s important to remember that your financial situation can change over time. Therefore, it’s essential to regularly reassess your emergency fund and adjust it accordingly. There is no strict formula for the “perfect” amount for an emergency fund because it depends on personal circumstances and comfort levels. A good starting point is to save three to six months of living expenses. However, you may need more or less depending on your situation. It’s crucial to strike a balance between being prepared for emergencies and not tying up too much of your money in a low-return account. You might want to consider paying off high-interest debt or investing for your long-term financial goals instead. Consider consulting with a financial advisor if you need further guidance.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
