The emergency fund ratio, also known as liquidity ratio, is a personal finance ratio to measure the capability of a household to meet expenses from the liquid assets ( i.e., quickly converted into cash).
In other words, it indicates how much ready your finances are to tackle emergencies such as job loss or other unexpected expenses.
This ratio helps calculate the household’s backup plan in times of loss of income or in times of economic misery.
How To Calculate Emergency Fund Ratio?
Its formula is by dividing the total assets ( liquid assets) by the total monthly household expense.
An ideal contingency fund ratio is between 3 to 6 or greater. It states that you have a minimum of 3 months of essential expenses saved in your wallet and are in a good state.
How Much Money Should be Kept in an Emergency Fund?
Around six months of day-to-day expenses and fixed expenses of about one year should be kept in a Contingency Fund for a good liquidity ratio.
However, accurate Emergency Fund numbers of any household depend upon the numbers of earning members of a family, the ability to raise credit, and income stability.