Determining Emergency Savings Needs

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By Dzhingarov

Emergencies are a part and parcel of life, which is why it is necessary to plan for them. Whether you have temporary employment loss or a very high medical bill, having extra cash will provide some financial cushioning. Creating this cushion for unexpected expenses is a wise decision.

emergency savings needs

The following steps will help you start saving and guide you down the path of financial stability:

  1. Consider risks and responsibilities

How many people do you have to support at home? Do you have tuitions to pay? Is your employment status stable or is your industry facing a freeze? These are some questions that you must give a serious thought to. You answer will provide guidance as to how large your cash cushion ought to be.

  1. What are your essential expenses?

Generally, it is a good idea to have 3 to 6 months of expenses put away for emergencies. This is a great starting point for all calculations. More savings is always better than less! There are several Savings Goals worksheets you can find on the Internet which can help you determine just how much you actually need to put away.

  1. Calculate short term cash requirements

Your cash savings should also consider expenses that you may incur in the ensuing 3, 5 and 7 years. This depends on risk tolerance. Do not put this money into stocks as they are too volatile and risky. Many online worksheets will also help you calculate how much your monthly savings ought to be to meet all your future expenses.

  1. Look for good returns rates on your emergency savings fund

Keep your short-term savings and emergency funds into separate accounts. This will help you get a better return. There are online tools which can help you arrange your  savings and costs by accounting for interest rates, account costs, risk and liquidity. This will help you find the best return on your savings.

  1. Utilize an emergency funds calculator

Enter ‘emergency funds calculator’ in any search engine. Choose a calculator that you feel comfortable with.  The emergency funds calculator will look at the following aspects:

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Current savings- This is considered an asset which can be utilized to pay off expenses.

Living Expenses-Common examples include mortgages, monthly rent, home repair bills, real-estate taxes and homeowner insurance policy.

Travel Expenses-These include car loans, car insurance payments, repair bills, monthly maintenance, and gasoline.

Personal Expenses- This category includes items such as life insurance premiums, dental insurance, personal loans, and medical premiums.

Household Expenses-These are costs associated with running your home. Examples include natural gas bills, water, cell phone service, internet access, heating, electricity, credit card payments and food.

Your emergency calculator will create a total of all your essential expenses each month.  Ideally, the calculator will give you two figures, a minimum emergency fund and an optimum emergency fund.

Given the volatile nature of the economic market, it is always wise to save ahead. An emergency savings calculator can help you figure out just how much you need to save.