Kim wants to know if she has enough in her emergency fund.
This is money that is
meaning she can spend it easily, like money in a bank account.
Kim saves 10% of her gross pay and has about $7,500 in her savings account to come to her rescue when needed.
If Kim lost her job tomorrow, she would still need to pay for these monthly expenditures: Rent her apartment: $1,400
Internet connection (she is looking for remote work): $60
Basic food and toiletries: $400
Car (paid for) - insurance and registration: $85
Student loans: $150
Cell phone (bundled with internet): $50
This makes his total monthly must-have amount = $2,300
Let’s find out how many months Derek can go without income: Total liquid assets / must-have monthly expenses = liquidity ratio
$7,500/$2,300 = 3.2
So Derek can go for about 3 months without income before he will run out of money. In general, people want at least 3 to 6 months of coverage. So Derek is doing okay, so long as he is confident he could find another job before the 3 months is up.
Keep in mind: everyone’s needs are going to be a bit different. So your target ratio should match your needs.