How Much You Should Have In Emergency Fund
Having an emergency fund or a safety net in your savings is pretty important. It can come in handy for things like a leaky roof, lost job, flat tires, oh and a global pandemic?
A lot of Americans live paycheck to paycheck, and as soon as they receive a small pay boost or a bonus, they immediately increase their expenses to match. This is a major problem. In fact, the median savings account balance for the average household is less than $5,000. That is barely enough to patch a roof and patch a tire! I hear this question all time from my financial clients, "how much should I keep in my emergency fund"? Well the answer depends on how you generate your income.
If you have a consistent W2 income with expected paychecks every two weeks, your income is much easier to track. You can also monitor your expenses quite easily as most of them will be fixed each month. In this scenario, I believe you should have 4-5 months of your monthly expenses in cash at all times. This is the necessities, not going to the bar, buying clothes, and new rims. This amount is the monthly expenses that have to come out for you to survive with your current standard of living. That amount will easily get you through a rough patch, some unexpected medical bills, and being unemployed for 3 months. Anything above this amount should be invested in multiple asset classes.
This platform is of course built for Pittsburgh businesses and entrepreneurs so we have to consider them as well. Anyone who owns their own company or who is on a 1099 contract without guaranteed income should follow this second rule of thumb. As a business your income is very volatile. You may make a killing one month and feel broke the next. That is why I suggest having a minimum of 6 months of your monthly expenses at all times in a reserve account. This savings should get you through any unexpected bills, loss of revenue, construction overages, and much more.
Many people in Pittsburgh feel that as long as they have enough money to pay this months rent and a credit card, then they are set. That is a scary way to live! While it isn't fun to sacrifice and build an emergency fund, once it's built you don't have to worry about it again. Anything extra coming in each month can be redirected to investments or something fun. While there is no perfect number for what should be saved and what shouldn't, this rule of thumb has kept me in a spot where I have never had to sweat paying my bills or unexpected concerns with my companies.