Once you accept that planning for the unexpected is the smart way to go, the question becomes: how much emergency savings do I need?

The answer depends on a number of factors. Watch below and be able to calculate the exact amount that makes sense for you.

Transcript:

You already know that you need to have emergency savings, but if you’re wondering how to calculate how much you personally need, then this video is for you.

First, let’s be clear what your emergency savings is for, because that’ll  inform how much you need. Your emergency savings is what you turn to if you suffer a loss in income, like you get laid off or are temporarily unable to work. Plenty of people don’t save up for this situation because they believe that unemployment or disability benefits will take care of them. But anyone who has ever been on unemployment or disability benefits can tell you that those benefits are not enough and they’re not always reliable. As a worker’s compensation attorney I’ve seen plenty of instances where a doctor releases someone from treatment, which terminates disability benefits, even if that person doesn’t feel physically capable of returning to work. So you want to see these benefits as icing on your cake if something should happen to your income, and definitely not the cake. You need your own savings if you should ever be out of work.

I recommend that you build an emergency savings account to cover your essential expenses for 3, 6, 9, or 12 months. Your essential expenses are things like rent, car, grocery and other bare basics for your survival and safety. Think of basics like enough to keep your roof over your head, enough food to keep from feeling hungry, and your car and car-related expenses to get you to and from work (if you work in person). You’ll also need money for household supplies and any monthly debt obligations, but not much else. This is only what you would need to get through the months where you had no income. This would not include what you spend monthly on wardrobe, dining out, gifts, travel, home furnishings, or grooming services. So take a look at your budget categories – I’ve got a video on what budget categories you need – so check that out if you’re creating a budget. Look over the list of categories and circle the essential ones. Then add up the amounts that you have budgeted monthly for each of those categories. Now you have the monthly amount of money you’d need for one month of emergency savings.

The next step is to multiply that amount by 3, 6, 9, or 12 months. This part is really personal and depends on your personal comfort as well as the industry you work in. I’m personally most comfortable with one full year of emergency savings. This is true despite having a number of income sources. Legal work is reliable but not my favorite so I don’t want to put myself in the position where I would need to do a lot of it. I really enjoy real estate and mortgages but that can be really up and down, as it is right now with rates being as high as they are. Financial coaching also goes in waves. Because of that, I want to have more emergency savings for the very slow months. I would never want to put myself in a position where I’m encouraging a client to buy a home or go through with a home loan that’s not in their best interest just because I’m desperate for the commission. So I like to leave myself plenty of cushion so that I can only do deals that are truly a win-win for everyone. These are the kind of considerations I make when determining that I want to  have 12 months emergency savings on hand. You might use other factors like how long it would take you to find a new job if you got laid off. You may feel more comfortable with fewer months saved if you have a really wide skill set and can find work in multiple industries, in case any one industry experiences a slow down. You might think about how sensitive your industry is to the economy and what has happened in past recessions. If you’ve never lived through a recession as a working adult, just know that one is coming – I don’t know if it’s soon or in a year or when but the economy works in cycles and you can be sure that you’ll experience a recession or two during your career. Also keep in mind how many people depend on your income. If it’s just you and you have a lot of skills, then you might be comfortable with 3-6 months of emergency savings, but you’d need 6, 9, or 12 months if you had a partner and/or kids.

While I recommend calculating how much you need based on the number of months you want to be covered if you should lose your income, some people just have an amount that they would feel comfortable keeping in savings. For some reason, in my experience, that usually means a number in increments of $25,000 with $25,000 and $50,000 being the most common figures I hear.

If you don’t currently have emergency savings, I would encourage you to create a values-based budget that will help you find out how much money you can transfer to savings while still meeting the rest of your obligations and goals. Then set up an automatic monthly transfer from your checking to your savings account – ideally an online high-yield savings account. Monthly transfers to savings and investments are the only areas of personal finance that I recommend a set it and forget it approach. Even if you don’t have a budget at this very moment, go ahead and set up a transfer even if it’s $50, just to get yourself started. Then create a full budget, and if you have debt, a debt-repayment plan, and then figure out exactly how much you can transfer to savings.

When you’re done filling up your emergency savings account, you can then use future transfers to go towards savings for your next set of goals. It could be anything including investing, paying for a wedding, going on a big trip, buying a new car, starting a new business, or a down payment towards a home. You can work towards several or even all of these goals at the same time, and you’ll be truly amazed at how much you can accomplish when you make savings automatic. So there you have it, hopefully you’re clear on how to calculate how much you need in emergency savings and are ready to make moves towards making it a reality today.