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On the other hand, having too much money in your emergency fund is also scary. You might be wasting a lot of financial opportunities if you put in too much money in your reserve fund.
2 tips when computing your emergency fund target
When calculating your reserve fund target, you should not only avoid having “too little” on your account. It is also important for you to avoid having “too much” funds.Some experts might go as far as to say that having too much on your reserve fund could compromise your road to financial abundance. According to an article published on Investopedia.com, instead of working on saving in an account that pays you 0%, you need to think about putting it somewhere it can grow your financial net worth. At the very least, you want to put it somewhere that can eliminate the areas that are sucking the money out of your net worth. For instance, debt is one area that takes away money from you - especially those that with a high-interest rate. Obviously, we need to find a balance. It is too reckless to live without an emergency fund but it is also a waste if you put too much into it. The key is to know the right reserve fund target so you can keep your finances secure without compromising the growth of your finances. Here are two smart tips that you can use to approach this problem. Know how much you can realistically live on each month. It is not enough that you get the sum of what you are spending. You need to think about the expenses that you will include in this sum. For instance, we do not suggest that you focus on the bare necessities in your spending plan. Most of the time, this does not include entertainment expenses. That could end up being frustrating in the long run. Think about the important expenses but continue to include even those that you know you can live without. That way, when you are forced to live on a 3-months worth of emergency fund, it is possible for you to stretch it for up to 6 months. Consider all your sources of income. One of the reasons why we set a reserve fund target is to prepare for unemployment. When you lose your day job, your cash flow will be compromised. This is when your emergency fund will come in handy. That being said, it is important for you to consider all your sources of income when you are computing for your emergency fund target. If you have successfully opened several sources of income, you might not need to save a high amount on your reserve fund. Calculate the number of months you want to be supported by an emergency fund. This is usually the final step in calculating how much you need to save for the unexpected expenses. How many months should you be saving? The best way to base it on is the average duration of unemployment in the country. According to the data published by the Bureau of Labor Statistics on BLS.gov, 4 out of 10 unemployed Americans are unemployed for more than 15 weeks. That is almost 4 months. It should be safe to assume that if you lost your job, you will need 4 months worth of expenses. But then again, if you have other sources of income, you can probably scale this down to 3 months. Think about these tips when calculating your reserve fund target. It will really help you keep this fund at a reasonable level - not too little and not too big either.