Table of Contents
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Do not index
This is the 2nd part of our ‘Emergency Fund’ article series.
You can jump to the other parts directly if you wish:
Part 1: What is an Emergency Fund? →
Part 3: Where to Park Your Emergency Fund? →
Part 4: How to Create Your Emergency Fund? →
Your emergency fund’s size should be at least Rs. 1 lakh.
Some of you may agree with this because your monthly expense is around Rs. 25,000 ✅
Some may disagree with this because you are probably spending upwards of Rs. 1 lakh in just one regular month 🤑
So we know that your emergency fund’s size should be a function of your lifestyle. Your regular monthly expenditure is a great proxy of your lifestyle.
Another factor to consider what situations is your emergency fund is provisioning for. We think the most important one is to protect your lifestyle between jobs.
To protect your lifestyle between jobs
If you read our introductory article on emergency funds, you will realise that we believe the primary function of your emergency fund is to protect you financially in case of job losses.
But protect how?
An emergency fund certainly can’t help you land a new job 🤷🏻♂️
Rather, your emergency fund should help you take care of your regular expenses as per your existing lifestyle until you start your new job.
So, it is like a financial bridge that helps you when you don’t have an active monthly income/salary.
It also helps you focus on landing that new job instead of worrying about where the next month’s groceries are going to come from.
Now, let’s look at what your emergency fund size should be.
Emergency Fund Size (Age wise)
According to a survey in the US, a person older than 55 will take almost 70%+ more time to land their next job than a person who is younger than 25.
So, while calculating the ideal emergency fund size, age is a crucial factor to consider.
Age Bracket | Minimum Emergency Fund Size | Good-to-have Emergency Fund Size |
Up to 30 years | 2 months of expenses | 3 months of expenses |
31-40 years | 4 months of expenses | 6 months of expenses |
41+ years | 6-8 months of expenses | 9-12 months of expenses |
Here’s how you should read the above table…
Let’s look at the age bracket of 31-40. If someone in this age bracket has regular expenses of Rs. 1 lakh, their emergency fund size should be between Rs. 4 lakh and Rs. 6 lakh.
Note 1: We have also taken into account the fact that after you hit ~30, you have more responsibilities: spouse, ageing parents, and children. Any uncertainty in your monthly income can have cascading effects when you have a lot more financial responsibilities beyond just yourself.
Note 2: The table is quite generic but personal finance is very personal and specific. So, make sure that the table makes sense to your personal finance situation. You may want to provision for more emergencies than just income loss. Then your emergency fund should be bigger in size.
Where To Park Your Emergency Fund? ->
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