A lot of money allocation strategies we hear about today will tell you to split your money into three common areas – spending on needs, spending on wants and money set aside for savings.
One area of our financial lives is often, therefore, omitted from discussion when we talk about money: emergencies.
Maybe it’s because we try not to think about things we cannot control or maybe it's because emergencies are too unpredictable for most of us to want to account for in our financial planning but nonetheless, setting aside money for emergencies needs to become a more openly addressed part of our conversations about money.
In the interest of helping with advancing that discussion, our blog today will tackle a very important subject: what is the right percentage of income to put aside for emergencies?
We’re going to start this blog off by revealing that, in truth, there really is no hard and fast answer to this question. It is not math or science where 2 + 2 = 4 (although some people in your life may still debate that) or we know that Cola and Mentos creates a particular reaction. With that said, however, there are still worthwhile recommendations that many experts have made when it comes to how much money to set aside in some kind of “emergency fund”.
For example, a popular rule for setting aside emergency funds involves having enough money to get by for at least 3-6 months with no salary. Having an emergency fund is all about creating a “safety net” of sorts for unexpected life changes such as medical bills (depending on where in the world you live) or sudden job loss. Conservatively, having enough money to support yourself for between three and six months without a job is a worthwhile rule of thumb. Of course, we say “conservatively” because the pandemic has taught us we may need to increase that pool of money but this is still a good general rule to follow.
To get more specific, a percentage amount we may recommend for an emergency fund is 15% of your post-tax income from every paycheck.
The reason we have settled on 15% is because we are starting with the 50/30/20 allocation strategy popularized by U.S. Senator Elizabeth Warren, where 50 represents the percentage of money spent on needs, 30% is for wants and 20% is for savings.
You don’t want to take away from money you would normally allocate towards savings but if you could split the allocated money for “wants” in half, we believe you are putting yourself in a good position to build up an emergency fund over time. Again, of course, this depends on your specific financial situation because you may need more or less set aside for emergencies based on your income level etc., but 15% is what we believe to be a good starting point.
What are your thoughts on the number we picked? Do you think 15% of post-tax income is too little, just right or too much of your money to set aside for emergencies? Let us know in the comments below.
Now that you’ve read our blog, we hope that you’ve gained some valuable insight into how to save and budget your money. Better yet, we hope that you like our content so much that you even share it with your children.
If you believe that this information is valuable enough for your kids, we hope you take it one step even further and sign your child up for the personal finance programs we offer here at Explorer Hop.
Covering topics from the basics and history of money to the stock market and global finance for children in grades one to twelve, we trust and believe that our programs will help your child get on a path to superior financial literacy both in the present and in the future!
Check our website out today and sign your child up as soon as possible! Happy learning!