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Emergency Fund Calculations

The emergency fund is an obligatory component of every retirement plan. It should be enough to cover your daily expenses for at least six months. It is necessary to have it in order to provide for your cost of living whenever you experience financial difficulties. In order to calculate whether your emergency fund includes enough resources to meet your crisis conditions you need first of all the desire to protect your lifestyle. Secondly you should make an approximate estimation of your annual expenses. Finally, you should check the amount you already have in your emergency fund.  

Emergency Fund Calculations

First, you should calculate the early expenses you encounter. Include also considerations about your expectations about future living costs. In order to calculate how much you need in your emergency fund, you should divide your early expenses by two. Next, you should compare the result with the assets you have in your current emergency fund. That is where most surprises occur.

In case you have a shortage or a surplus you should note it in a piece of paper. We hope that you have incurred a surplus. If this is not the case, the time has come to make a clear plan to fix the shortages.

How to Fix an Emergency Fund Shortage

In order to compute how much time you will need to fix the occurred shortage, you should determine how much you can allocate each week to correct it. Then divide by this amount the existing shortage to find how much time you will need in order to put your emergency fund in balance and reach your predetermined goal.

Example: You have incurred a $3000 shortage in your emergency fund. You can allocate as much as $30 per week. Therefore, after 100 weeks you will be able to cover the shortage. ($3,000 divided by $30 = 100 weeks).

Final Piece of Advice

When determining your yearly expenses don't try to deceive yourself by writing down an unrealistic amount. This can only worsen the state of your emergency fund. Additionally, deal with it as seriously as possible since it represents a sort of an insurance against future mishaps. Finally, allocate as much as possible and whenever you have any spare money put them in.

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