How much emergency fund will help you to retire early?

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How much emergency fund will help you to retire early?

How much emergency fund will help you to retire early?
An emergency fund is an asset. It is the most sensible financial tool to hold onto when your plans are to grow sufficient savings.

Given the constant inflation that the present economy is facing, it is highly unwise to skip an emergency fund plan.

Moreover, a fat emergency fund will also help you to retire early! This is what we will revise in this topic!

But, if you are someone, who’s not quite sure what an emergency fund or savings is, and how helpful it is, then I will explain it to you right away.

Why should you have an emergency fund and how does it help you?

You have a steady income, good!

You manage to do savings along with your expenses, that’s even better!

But have you given a second thought to your savings? What I mean is, along with your normal savings, you should also do an emergency savings!

Emergency savings is usually preferred to be an amount that equals to six times of your current monthly income.

The purpose of emergency savings is to help you maintain your financial standards in times of upsetting situations. Examples of those can definitely be job loss, heavy medical costs, and other unexpected expenses.

However, our concern for today is a bit different. We will see how much emergency fund is enough for early retirement!

Why should you plan to retire early first of all?

If you retire early from a workforce, then all you will smell is freedom and independence. You might also say that this is the new trend among employees who want to fly solo.

Once you exit your stereotypical work routine, you can dedicate your time to freelancing or pursuing the career that you have so long desired!

On the other hand, many want to dive into entrepreneurship and surface various options of investment and other financial vehicles like stocks, bonds, etc.

But for all those fields, you need to have one thing and that’s capital. So, from where will you get that capital? Obviously, you need to work hard for some organization and earn your funds!

That’s where you can put emergency funds to some good use. By building adequate emergency fund like say at least 12 times of your monthly income amount, you will be able to quit your present workforce faster.

How to retire early with the perfect emergency fund:

First thing’s first, I will never want you to consider your personal savings as your emergency fund!

Consider other options like making a separate savings, which you can call your emergency fund, where you dedicate an extra 10% of your monthly salary on top of your normal savings plan.

You can also slowly start investing in mutual funds or play with stocks. Another viable vehicle is your Health Savings Account where your unused money gets rolled over to the coming years and you can take it out in a big lump sum amount.

Again you can try out a certificate of deposit if you really want to make emergency funds a very important part of your financial life.

# Here I will be stating an example to help you get a rough idea of how much should be your emergency savings:

Assume that your monthly salary is $5000 (Post-tax). Then as per a normal budget, if you dedicate 10% of that salary for savings, you can roughly stash away $500 per month.

Now, if you can ration your monthly expenses and be able to punch in another 10%, then you have successfully launched your emergency savings plan.

So you have one savings account and another emergency funds account. Leave aside the traditional savings account and concentrate on the emergency part.

In about 10 years, you will be able to save $60k; that’s equal to one annual income of yours. Hence if you start to apply this plan, then within 10-15 yrs from now, you will be able to retire!

Does early retirement with good emergency fund mean a work-free life?

No! Never!

One does not retire early to quit working.

Once you get free, you will be able to dedicate your whole time in establishing a career, a business, or a platform of investment that you wanted for so long.

You have the emergency fund as your capital. Now all you need to do is start proper investments to get some good returns.

Is achieving a good emergency fund and early retirement that tough?

I would say it’s a bit tough in the sense that you will have to make a few sacrifices.

Going for an early retirement demands good savings. You will have to be a bit low profile and maintain a frugal life to some extent! Also, you should avoid costly money mistakes.

Remember, if you don’t have at least 12 times of your monthly income in your emergency fund, then it might turn out to be a bad early retirement idea!

Last Updated on: Wed, 1 Aug 2018

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