You'll often hear that it's important to have a healthy emergency fund for protection against life's unknowns. As a general rule, you should have enough money in a savings account to cover three to six months of essential bills. That way, if you lose your job or encounter another unplanned expense you don't have time to save up for, you can tap your savings rather than instantly start racking up debt.
Now there are different tools you can use to calculate your emergency fund. But at the end of the day, what you're really doing is taking your non-negotiable monthly expenses and multiplying that figure by three to six, depending on how much of a cushion you want to build for yourself.
Many people only include their essential expenses when setting their emergency savings goals. Here's why I include leisure spending in mine.
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A slightly different approach to emergency savings
The logic behind socking away three to six months of essential bills in the bank is that you need a means of paying for things like food, housing, and medication even when your income runs out. You don't necessarily have to keep paying for a gym membership if you've lost your job and can't afford it.
In my mind, if I were to lose my job or income for a period of time, cutting out certain non-essentials just wouldn't be reasonable. Take cable or streaming services, for example. If I'm out of work and stressed, I might need the distraction that watching sports or silly TV provides.
Also, if I'm trying to network my way into a new job, I might need to go out and be social so I can talk up my skills to different people. In that case, I’ll need money budgeted to be able to dine at a restaurant, even though I can cook less expensively at home.
Similarly, because I have children, my emergency fund includes money that would enable me to keep paying for their activities in the event of a lost job. After all, do I really want to make my kids drop out of martial arts for several months and fall behind if I'm out of work? I'd rather not have to do that. When I calculate my emergency fund, I don't just take my essential bills into account; I also include money for leisure.
What should your emergency fund look like?
If you're in a similar boat to me, then you may want to boost your emergency savings to allow for some leisure spending when you're going through a tough financial time. That said, your emergency fund is something you can always keep adding to, so if you don't save enough to cover leisure spending right away, you can add to your savings in time.
Let's imagine your essential bills come to $3,000 a month, but you spend another $600 a month on cable, takeout orders, and your kids' dance lessons. You may initially aim to save $9,000 so you have three months' worth of essential expenses on hand. But then, as your earnings and expenses allow for, you can add to your emergency savings. That way, if you were to lose your job and fall back on those savings alone, you'd have money to cover those reasonable luxuries.
Either way, know that having any type of emergency fund is a smart move. If your emergency savings fund doesn't have money for leisure, that's also not something to beat yourself up over.
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November 07, 2021 at 08:32PM
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Why I Include Leisure Spending in My Emergency Fund - The Motley Fool
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