Sofia and Luis want to prepare an emergency fund. Together, they earn $50,000 per year. They...
Sofia and Luis want to prepare an emergency fund. Together, they earn $50,000 per year. They save 10% of their income, and they pay roughly $9,000 in taxes per year. How much should they at least have in their emergency fund?
Please explain how to get the answer!!!!
Homework Answers
Annual Income = $50000
Savings = 10% of income = 10% * 50000 = 5000
Taxes Paid = $9000
Living Expenses = Annual Income - Taxes Paid - Savings
= 50000 - 9000 - 5000
=36000
Monthly Living expense = 36000 / 12 = $3000
According to a rule of thumb an emergency fund should at least have 3 months worth of living expenses
Hence, minimum amount in the emergency fund = 3*$3000 = $9000
A conservative view estimates the emergency fund to have a minimum of 6 months worth of living expenses.
In this case minumum amount in the emergency fund = 6*$3000 = $18000
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