Friday, July 27, 2018

Goal #2: Have a Fully Funded Emergency Fund by 2020

I've decided that I'm going to work on my first two financial goals concurrently. This means that I'll be paying off my student loans less aggressively, but it also means that I'll still have money on hand if I were to need it. Since that's kind of the point of an emergency fund. From my reading, I've seen emergency funds explained in two ways. Either, 3-6 months of expenses or 3-6 months of income. Both make sense to me for different reason, but only one really works for my current lifestyle.


3-6 Months of Expenses
This method actually makes the most sense if your emergency is that you lost your job. You'd want to be able to cover your living expenses while unemployed for however many months it takes to find new employment.

It's also easier to build up this amount of money, because you'd need to save less. For me, my only essential expenses are rent, cell phone, bus pass, and groceries. My monthly total: $550. Which makes my emergency fund goal $1,650 - $3,000. Doable. Done, actually.

Now, that doesn't seem like a lot of money, but it's also nothing to scoff at. If I lose my job, I actually have over a year's worth of expenses in my saving's account. But since my rent and cell phone are already paid for the year, I have a lot more coverage than that.

However, job loss isn't the only emergency. This money could cover other unexpected expenses as well. Or maybe it can't.

3-6 Months of Income
This is the method that I'm going to go with. Not only does it cover monthly expenses, but it has the ability to cover more costly emergencies as well. Plus, what if my living situation changes? My monthly expenses could go (way) up and then where would I be?

My average monthly take home pay is $1996.54, so I'll be looking at an emergency fund of $5989.62 - $11,979.24. Let's just round up to $6,000 and $12,000. Much higher than simply looking at expenses, but still doable.

I'm willing to set aside $5,000 of my current savings, so now I'll need between $1,000 and $7,000 more over the next 17 months. So I'm looking at a monthly contribution between $58.82 and $411.76. That's quite a large range, especially given my low income status. But it's doable. I can do that.

Even going for the 6 months of saved income, I'd only need to maintain a 20% monthly savings rate. This certainly leaves room for me to also pay off my student loans, with some wiggle room.

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