How to Estimate Your Savings Goal
The general rule of thumb is saving 3-6 months of essential expenses. Depending on circumstances, some people may need slightly more.
To get a better idea of what you should be saving, take a look at these significant factors that will affect your savings goal:
- Household structure (single, with a partner or dependents)
- Number of incomes in your household
- Side income streams
- Bills (mortgage/rent, insurance, utilities, transportation, etc.)
- Debt payments
- Current amount of liquid assets
- Job stability and steady income
- Ability to quickly find a new job in case of unemployment
Everyone will have a different set of circumstances that will adjust the minimum amount of emergency funds that should be saved, so take a good look at your current lifestyle and portfolio to see where you stand.
If you are a single person with no dependents and low overheads, you likely do not require more than 3 to 6 months expenses in savings. If you are the primary breadwinner with a family to support and kids’ school fees, you may want to have a bit more set aside.
Finally, you are the kind of person who finds it difficult to sleep at night unless you have quite a bit of cash available, then we recommend you save 6-8 months of costs. Yes, you will have less of your money working for you, but you also can’t put a price on peace of mind.
Having Too Much Cash is Also a Problem
Remember, just as important as having enough set aside for your emergency fund, is making sure that your holdings do not get out of hand. An emergency fund should not be larger than it needs to be; otherwise, cash that could be working for you will be sitting in your bank account loosing value due to inflation. As mentioned above, this is particularly important in Japan, where cash in the bank earns you zero.
So, once you have set aside the required amount, you need to think about the next step: making your money work for you.
Tips for Building Your Emergency Fund
Not sure where to get started?
Here are some basic steps to take when starting your emergency fund:
- Begin with a basic calculation of your monthly expenses and multiply that by 3 to 6 times depending on your circumstances. This will give you a general idea of what the minimum amount is needed to cover your living costs for half a year.
- Create a habit by setting up a regular savings goal. Choose an amount that you can comfortably put away each month.
- Set up a direct deposit for easy payments. This will keep the savings amount growing without a second thought.
- Adjust and increase contributions when extra money comes your way. Build up your savings faster by contributing things like tax refunds and bonuses.
- Occasionally reassess your emergency savings to account for inflation or new factors that will affect your expenses (new baby, loans, investments, etc.)
Once you have secured your emergency fund and are ready for the next stage in your financial planning, contact a financial advisor here at Argentum Wealth for a free consultation. We would be happy to help you take a disciplined approach to investing to maximize your long-term wealth.