EMERGENCY FUNDS
What is an Emergency Fund?
An emergency fund is a financial safety net designed to cover unexpected expenses or financial emergencies, such as medical bills, car repairs, or job loss, without the need to incur debt.
It typically consists of enough money to cover three to twelve months' worth of living expenses, providing peace of mind and financial stability in turbulent times.
However, if an emergency fund is too large, it may result in an opportunity cost, as excess funds could have been invested to potentially yield higher returns instead of sitting in a low-interest savings account.
How much is enough?
To calculate an emergency fund, start by totaling your monthly expenses, including rent or mortgage, utilities, groceries, insurance, and any other regular payments.
This calculation should also consider variable expenses such as dining out, entertainment, and personal spending to ensure a realistic view of your financial needs.
Once you have a clear picture of your monthly outgoings, multiply that number by the number of months you want your emergency fund to cover, typically between three to twelve months, to determine the total amount you should aim to save.
Why right sizing your fund matters?
At Selective we generally recommend a three-month emergency fund, which strikes a balanced approach between financial security and minimizing opportunity cost. By limiting the fund to three months' worth of expenses, individuals can reduce the amount of capital idling in low-yield accounts, allowing for more of their resources to be invested in higher-return opportunities, thereby enhancing overall financial growth potential.
Calculator
The calculator below can be used to calculate your emergency fund and also compare emergency funds of various sizes against a twelve month fund. The twelve month fund is selected to demonstrate the opportunity cost if you set too much aside over long periods of time.
The calculators on the site provide a high level overview of your financial picture. For comprehensive planning, schedule a meeting.
