As a thumb rule, one should put aside three-six months of expenses as emergency funds. However, this rule may not hold true for everyone. If you belong to any of the categories below, here’s what you should do.
If you are someone with an irregular income—a self-employed individual such as an artist, freelancer or consultant—there is a good possibility that you may get large chunks of funds for a few months but see a dry spell in others. In such cases the thumb rule won’t suffice. Most planners say that for such people it’s best to have at least one year’s expenses as emergency fund.
Even if you are a salaried individual and get a fixed monthly salary but are employed in a sector which may potentially get affected by a slowdown in the economy, it’s best to have at least one year’s monthly expenses put aside as emergency fund. This holds true especially if both spouses work in such sectors. However, if at least one of the partners work in a more secure sector, such as any public sector job, and the salary is healthy, you could still stick to the three-six months expenses as thumb rule.
Too much debt
If you are someone with too much debt or have various types of loans—home loan, car loan, personal loan—go beyond the thumb rule. Ideally, you should not have more that 35-40% of your monthly income going towards servicing various loan repayments. But if you’ve already passed that 40% mark, it’s best to have a year’s monthly expense kept aside as contingency fund. Do so even while repaying your debt aggressively.
If both the partners work and there are no dependants, then the thumb rule can be followed. However, if you are the sole earner of the family and have dependants, then consider having a year’s expenses as emergency fund.
Finally, while calculating monthly expenses, account for living expenses, monthly instalments and lifestyle expenses. Also keep in mind to account for the inflation.