Should your emergency fund include only essential expenses?
My country definitely exceeds that.
the main points
- You’ll often hear that your emergency fund must cover at least three months of essential expenses.
- My emergency fund contains money for non-essential purchases, too.
You never know when life might throw you into a curve. Your home’s heating system might stop working on the coldest day of the year, or your car might break down and require an expensive repair without warning. Or, you may lose your job and have your income limited to slow unemployment checks for a while while looking for work.
For all of these reasons, having an emergency fund is very important. Without money in your savings account, you may have to go into costly debt the moment unexpected expenses arise.
You will now generally hear that you should have enough money in emergency savings to cover three to six months of basic living expenses. And in fact, these days, some financial experts advise people to increase that goal to six to 12 months’ worth of basic bills.
But my emergency fund is beyond basic expenses. It also has money to cover non-essential costs. You may wish to take a similar route.
It’s all about reasonable expectations
There’s a reason financial experts tell you to make enough money to cover your basic bills. When necessary, you can always cancel the cable or stop eating at restaurants if you are unemployed. But you can’t stop buying groceries, paying for medicines, and covering rent or the mortgage, because you need to eat, stay healthy, and have a roof over your head.
But when I calculated my emergency fund, I included money for not only basic expenses, but also some non-essential ones. The logic there is simple. If I were to lose my job, I don’t think it would be reasonable for me to spend my days having fun zero Entertainment while looking for a job. Thus, there is money in my emergency fund to allow me to continue paying for things like cable, streaming services and even the occasional restaurant meal in a scenario where I have no income.
Now if you calculate your emergency fund and save enough cash to cover your basic bills for a number of months, you’re in really good shape. But you may want to increase your cash reserves so that if you find yourself unemployed and living off savings, you still have the option of socializing occasionally, enjoying some entertainment, and maintaining your mental health.
Time to restart these numbers?
If it’s been a while since you raised your emergency fund, now is the time to reconsider your savings and make sure your cash reserves are adequate. Remember that the cost of living is high these days across the board due to inflation, so while you might think you have enough cash to cover six months of basic bills, you may, in fact, only have enough for five months.
But while you do that, see if you are able to mobilize your savings so that you have some money to cover non-essential expenses in the event of a job loss. Doing so could make the tough times a lot easier.
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