How to Create an Emergency Fund

Aside from your retirement plan, you should also have an emergency fund with an amount equal to about six months of your annual cost of living. This emergency savings fund could be your salvation in case times become lean. To know whether you have enough money for the rainy days, use this guide to calculate the status of your emergency fund. This should help you to set some goals for getting or maintaining the fund.

Get your yearly cost of living – On a piece of paper, write down your yearly cost of living. This is achieved by listing all of your spendings for a month, including bill payments and luxuries such as shopping and weekends-out with the family. Then, multiply that amount to 12 to get your yearly cost of living.

Get your amount needed in emergency fund – To determine how much you need for your emergency fund, simply divide your yearly cost of living by two.

Determine your surplus or shortage – If you actually have an emergency fund, subtract that amount from the cost you need for your emergency fund. If your emergency fund costs more than the required amount, you have a surplus of funds which is admirable. However, if your emergency fund costs less than what is required, you need to set aside as much as you can to meet that amount. This is especially true if you do not have any emergency fund in the first place.

Correct the shortage – If you are short on emergency funds, divide the amount of shortage by how much money you can afford to put aside each week. This will tell you how long you must save to reach your goal of meeting the amount needed for your emergency fund. For instance, you need $1000 to reach your goal and can afford to put aside $20 each week. It will take you 50 weeks to correct your shortage.

 

Posted by Ardent Editor on Jul 17 2008 in Financial Planning

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