The most general guide that can be found on how to compute your emergency fund is to have 3-6 times of your monthly salary ready in case you have an emergency.
This may work for some, but let’s face it, not everyone has the same nature of work and not everyone has the same responsibilities and expenses.
For some, saving a month’s worth can be easily achievable in 2 months or so, while to some, it can be dreadful.
This quote is from Ready To Be Rich as he shares how you can effectively compute your recommended emergency fund more accurately based on your personal lifestyle.
“Personal finance is a personal matter; and nobody knows what’s best for you than yourself.”
In a nutshell, these factors affect your emergency fund computation:
Monthly expenses
List all your monthly expenses. This includes your bills, debt payments, transportation and food allowance, insurance premiums, entertainment budget. Basically, just everything that you spend on a monthly basis.
Multiply this by 6, and that’s your ME.
Income margin
This is for those who do not receive the same amount of money every month, like freelancers or entrepreneurs. To calculate this, subtract your lowest monthly income in the last year to the highest one.
Multiply this by 3, and that’s your IM. Leave at 0 if you are an employee.
Income handicap
This factors your ability to source a new job when you lose your previous one. Generally, this will just be half of the years that you have been working for your longest client or your current company. The idea is that the longer you are working for a job, the harder it will be for you to get another job.
Divide this by 2 and multiply to 1 monthly expense, and that’s you IH.
Possible emergencies
No matter how prepared you are, there will always be emergencies that will arise like flood or calamity or even job layoffs. An advice says to ask the nearest hospital how much an appendectomy costs or the amount of 4 brand new tires if you have a car.
That is your PE.
Equation
Now all you have to do is get the sum of your ME, IM, IH, and PE. That’s your recommended calculation of emergency fund.
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