Why not take a few minutes today to calculate a target cash balance for your emergency fund, so that you can start saving for the unexpected now?
This is one of the easiest practice I recommend in my book, Mindful Money, because there are just two data points you will need for this calculation:
- Your total monthly expenses
- How many months of emergency savings you need or want to have
First, add up all of your monthly expenses. If you did my Balance Sheet exercise practice a few weeks ago, you’ll find those monthly expenses at the bottom of your “expenses” column.
Next, multiply that monthly expense figure by the total number of months of emergency expenses you plan to save. Depending on your current phase of life, this usually ranges from three months to two years, or you can simply target a minimum benchmark of six months. The appendix of my book also includes a chart with these recommendations.
Then, decide how much money you will devote to building up your emergency fund every month. Start saving that money in a cookie jar or bank account now.
If you want to determine how long it will take to reach your savings goal, you can divide your emergency fund target by the dollar amount you plan to save each month. Or do the opposite: set your emergency fund target amount and a target date to determine your monthly savings plan. For example, if your goal is to put twelve thousand dollars in an emergency fund within two years, you would plan to save five hundred dollars a month for twenty-four months.
Even if you can only afford to allocate fifty dollars a month toward building your emergency fund, start saving now.