Question

If the Potinsky household spends ​$42 900 annually on all living expenses and​ long-term debt, calculate the amount recommended for an emergency fund. How might household circumstances​ (e.g., wage earners in the​ household, available​ credit, and type and stability of​ employment) affect this​ decision?

Answer 1

Although, Requirement of Emergency Fund and the amount of it, is Subjective and dependent on various situations, It is Recommended to have at least 3 to 6 months expenses as an emergency fund.

Therefore, in this case,

Amount recommended for emergency fund is 42900/4 to 42900/2 = 10725 to 21450.

Requirement of emergency fund can be due to several reasons such as, Job Loss, Medical emergency, or in extreme case Death.

Therefore, it is required to look into the different household circumstances such as:

1) If there are other members in a family, earning, then in that case one can decide the requirement accordingly because there will be some income available.

2) If there is any credit available, for any kind of expenses, then there might not be a situation to pay such expenses immediately. Therefore, it should also be taken into consideration.

3) In case of death, it is required to know the time that will be required to receive the insurance claim, another family member's chances of getting a job and time requires for other member to start earning. Amount needed for after death ceremony should also be considered, and emergency fund amount should be accordingly.

4) These were some of the common circumstances. Apart from these, other Subjective and Personal circumstances should also be taken into consideration.

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