Most budgetary specialists suggest that you have somewhere close to a quarter to a half of a year of everyday costs in your backup stash. The three-month rule is, by and large, suggested for individuals in salaried positions who have safer work. The half-year suggestion is for individuals with less steady work or winning variable earnings.
If you fall into the subsequent class, a pay decrease may be more probable than a real employment misfortune. A “just-in-case” account can be utilized to help spread your essential everyday costs when your salary has decreased. Typically, you will have to reconstruct your record when your salary increments. The fundamental thought will be to develop the history during high-acquiring months, anticipating low-salary months.
The size of our emergency fund is not a minor issue. If it is too small, we risk it being insufficient, but we will be leaving idle money to invest to reach our financial goals if it is too large.
How Large Should Your Emergency Be?
Many finger rules try to tell us what size our fund should be for emergencies.
Many experts in Personal Finance point out that a good fund for emergencies should ideally comprise between 3 and 6 months of our monthly income. Others think it is better to be between 9 and 12 months.
When I see this type of rule, I always start thinking about why there is a divergence of criteria. Why 3 or 9 months? Why not seven and a half months?
Let us face it: the contingent event may fall anytime at us. History has shown that businesses have shut down in seconds because of inadequate emergency funds. Since not all companies are massively stable, emergency funds keep us from inconveniences regarding our finances. We should set aside enough funds to cover any drastic that may befall our brand anytime.
The Emergency Fund for You
As I have always said, personal finances are that private. Therefore, the ideal size of the emergency fund should be based on your situation and needs. How are you financially? How much money do you require every month? Ask these questions, and then decide!
It is not the same for a person who has a stable job, lives alone, has no debts, is an independent contractor with no fixed income, has three children in private school, pays the mortgage, and has a debit balance on their credit cards. Both need an emergency fund of vastly different sizes.
An Emergency Fund for People with Formal Employment
People with a steady job in a stable company may think that they will receive a liquidation equivalent to three months of integrated salary in case of loss of employment, plus 20 calendar days per year worked. This cushion gives you peace of mind to find another job, although we must admit that it is not easy to find another job quickly and pay a similar salary in Mexico. That is why we need our emergency fund as an additional cushion.
Suppose one is used to paying his credit card’s entire balance each month and does not have durable consumer debts. In that case, it may be sufficient to maintain an emergency fund of at least the equivalent of between 1 and three months of spending: an amount that makes us feel comfortable to face any extreme situation.
An Emergency Fund for Independent Professionals or Commission Agents
Nevertheless, independent professionals who have income from fees do not receive a settlement if they lose one of their clients. Then, they do not have any mattresses, but they can substitute that source of income.
On the other hand, depending on the type of work, there may be times of crisis during which several months pass without significant income. Therefore, from my perspective, independent professionals should think about having an emergency fund of at least the equivalent of 6 months of their current monthly expenses, if not more.
In this situation, we should consider having a mattress of at least three months of current family spending, which allows us to avoid a sudden income loss. But it is perfectly possible to have a situation of urgency just when one loses his income; those three months are insufficient. You can think and keep money equivalent to the deductibles of our insurance, as described above.