Many financial experts believe that living defence funds should be prepared for three to six months of living expenses. However, this advice is quite wide.
Here’s how to determine the minimum cost to include in your life defence fund and whether your savings goal should be three months, six months, or more.
What is the Life Defense Fund?
Livelihood defence funds are cash on hand to prepare for financial emergencies such as unemployment, sudden medical expenses, and car repairs.
Unlike high-risk investments such as IRAs (Individual Retirement Accounts) and 401 (k) (Defined Contribution Pensions), life defence funds can be withdrawn immediately without penalties or fees.
Generally, it is recommended to make a living defence fund before you start investing, but if you are suffering from repayment of high-interest rate debt (annual yield of 10% or more), you should pay it first.
How to calculate life defence funds
Experts recommend securing spending for 3 to 6 months.
It may sound like a joke to someone who spends their salary every time, but it’s a good idea to set short-term goals and build up your life defence funds accordingly.
For example, for 3 months, first, write down the total amount of spending required each month as follows.
Housing / rent / food / medical insurance / utilities / transportation / borrowing
Expenditures that are not included (at least not yet) will include monthly “I wish I had” spending, as follows:
Eating out ・ Entertainment (including subscription) ・ Vacation ・ Other savings
Use the Emergency Fund Calculator provided by Fool.com to calculate your spending. By doing so, you may be surprised to find hidden spending that can be used to fund your life defence, such as rarely used forgotten subscription services and restaurant meals.
In any case, the goal is to use some of the savings to fund life defence.
There is controversy over how long a living defence fund should be funded, but it’s just for emergencies, so the sooner it is, the better (save at least a month’s spending within a year). It’s a reasonable goal).
If you’re starting from scratch, consider saving $ 1,000 as your first achievable goal (with enough savings to cover your unexpected $ 1,000 spending among Americans). Only 40% of people have it).
Think with 3/6/9 rules
It might be a good idea to use the 3/6/9 rule to think about how much you should save your living defence funds.
If you want to save three months’ spending
Have a stable job, a stable salary, minimal debt, and live alone without a mortgage or dependents. If you always have the option of living with your parents as a last resort, your living defence funds will be much lower.
If you want to save six months of spending
I have children and have a lot of debt, such as mortgages and student loans. If you have dependents, you will need more room.
If you want to save nine months of spending
Work is unstable, or income is irregular, such as contract employees and freelancers. If you have children and you are the only earner in your family, it is ideal to have nine months’ worth of cash funding.
Where should I keep my living defence funds?
Liquidity is the most important factor needed for livelihood defence funding. This means that you can get the cash right away, with no penalties or fees.
Therefore, it is better to keep it in a savings account, checking deposit, or financial market deposit account, instead of storing it in an investment destination such as an IRA and immobilizing the funds.