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Planning Your Contingency Fund: How Much You Need

written by: moonshadow•edited by: Laurie Patsalides•updated: 8/3/2009

Okay, so you know you need to be putting money away for a rainy day, but just how much money should you have in your contingency fund? Here are some simple steps to figure it out.

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    Contingency Fund Necessities

    Most of us have heard the old proverb about saving for a rainy day, but with the current economic conditions, it would be easy to argue, it’s raining now. So, how much money should I have saved in my contingency fund?

    The answer depends largely on your personal assets and debts and what you need to survive. Obviously, if you have no savings, then the short answer is more than you have now. The longer answer becomes more complicated.

    Many experts say you should have enough in your contingency fund to cover basic living expenses for a minimum of three months and preferably closer to six months. A number of factors should be considered when figuring out the amount of money you need in a contingency fund.

    First, decide who depends on you to have that income. Do you support your children, spouse, parents or pets? It is easier to have less in a contingency fund if the only person that affects is you. With children or a spouse relying on your income, you must make sure that they can meet those needs if you lose your job or have another financial emergency.

    Second, decide who you can depend on if things get really bad. Do you have a family member who would take you in if you lost your home? A friend who will help feed you? If not, then the amount of money is your contingency fund should be higher and should assume that you have to go it alone for several months.

    Next, what bills do you absolutely have to pay to survive? Most of us could unwillingly live without cable or Internet service, but the mortgage (or rent), car and house insurance, car payment, food, and basic utilities are vital to survival. Look at your budget and determine what are essentials. Don’t forget money for toilet paper and laundry soap, pet food and supplies like kitty litter. Also consider using funds to reduce credit card debt.

    Don’t have a budget? Stop right now and make one, using the helpful hints found here.

    Now, it’s time to do some calculations. The last time you were out of work, how long did it take to find a new job? Given the current economy, double or even triple that and use it as your guideline to figure out how long you’ll need to live without a paycheck. Then, add another three weeks delay before you receive the first check at the new job.

    Take your budget and multiple it by the number of months you could be without a paycheck. Then, add in an extra amount, $500 or $1,000 depending on the age of your car, for emergency car repairs which always seem to spring up at the last moment. That number is way bigger than you expected, right? That’s the amount of money you should have in your contingency fund.

    However, if the size of that number is overwhelming, don’t let it keep you from saving anyway. Even without meeting the goal of your contingency fund, you now know what needs to be done. By setting aside even a few dollars each month, the savings goal becomes more and more attainable. Good luck!