How much money should you save in case you lose your job?
It's suggested that you have three to six months worth of living expenses saved. Here's how you can build up this emergency fund.
Suddenly losing your job is something that you can't predict or control. There are a number of reasons why you might lose your job, and some of them are completely out of your hands (for example, if the company closes down). However, making sure you've got enough money saved to get you by until you're able to find another job is something you can start working on right now.
This guide outlines how much you should aim to have saved in case you lose your job and includes some tips for building up your emergency savings.
Why should you have emergency savings?
Employment can be unpredictable and a job is never completely guaranteed. Even though your job might be safe for now and you're a top employee, things can happen that are out of your control. For example, what would you do if your company suddenly went out of business and needed to close down? What about if your company lost a few major clients and contracts and therefore couldn't afford to keep all staff on board?
If you suddenly found yourself without a job, it means you'll also suddenly find yourself with no money coming in. However, all your regular expenses like utility and phone bills, rent, groceries and medical expenses will remain. Without any savings in the bank, you might struggle to pay for these ongoing living costs while you're hunting for a new job.
How much should you have saved?
There's no rule set in stone about how much you should have saved in case you lose your job, but there are a few rough figures to aim for. The amount you need to have saved will depend on a few factors, including:
- Your previous income
- Your living expenses like rent and bills
- If you have any additional expenses like medication costs
- The industry you're trying to get a new job in and how competitive it is
- Where you live (smaller towns have fewer jobs available)
Three to six months of living expenses
A good rule of thumb is that you should aim to have at least three to six months worth of living expenses saved. The reason is that it could take you several months or even longer to find another job, especially if you're looking in a competitive industry or you aren't in a major city.
So if, for example, your monthly living expenses are usually around $2,000, you should aim to have at least $6,000 to $12,000 saved up in an emergency fund. If your monthly living expenses are a lot higher at, say, $5,000 per month, you'll want to have at least $15,000 to $30,000 saved.
To figure out your monthly living expenses, take a look at your bank account transaction history for the past three to six months. By doing this, you'll be able to calculate how much you spend on average each month, to give you an idea of your monthly expenses. It's important you do this rather than trying to simply add up your rent and bills, as it will give you a much more accurate idea of your spending habits.
The 50/30/20 rule of thumb
the 50/30/20 rule of thumb is a standard savings goal that can be used by anyone on any income. This strategy isn't an amount that you should have saved up (like the previous strategy), but instead it is a guideline of how much you should be saving ongoing.
This is what the 50/30/20 rule means:
- 50% of your income: This is the maximum amount of your income you should be spending on living expenses like rent, bills and groceries. If you're spending a higher percentage of your income on living expenses, you could consider making some lifestyle changes like moving to a cheaper apartment, trying to cut back on your grocery bill or switching to a cheaper phone plan.
- 30% of your income: This is what you can spend on everyday purchases that aren't living expenses. For example, things like entertainment, buying new clothes and going out for dinner with friends. These are part of your monthly spending, but they're not classified as necessary living expenses.
- 20% of your income: This is how much you should try to put into savings each time you get paid. This money can be used to build up some emergency savings for a rainy day, which you can also use if you suddenly lose your job.
For example, if you got paid $4,000 per month you'd try to spend no more than $2,000 on living expenses, $1,200 on everyday spending and $800 would go into savings. If you earned a higher income at, say, $6,000 per month you'd need to put at least $1,200 into savings each time you were paid.
The trick with this strategy is that the longer you stick to it, the more you'll have saved up in your emergency fund. These numbers are just a guide and you might find that you can save even more than 20% of your income.
With the money that you do save from your income, it's a good idea to open a high interest savings account. A high interest savings account will make your money work harder for you while you're not using it, and will help your money grow.
Compare savings accounts to put 20% of your income into
How to save money in case you lose your job
Now that you know how much you should be trying to save in case you suddenly lose your job, here are some tips to help you achieve this:
Look at your current spending and make changes
Look at your transaction history to identify where you're spending the most money, and where you have capacity to save. You might find that you're spending a lot more money on eating out than you realised.
Make everyday changes that will help you save more
Look for deals when doing your grocery shopping, use coupon codes when buying things online and switch to the generic brand medications. We've got 50 of our best money-saving tips listed for you in this guide.
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