How Much Emergency Fund Is Enough?
January 25, 2009 – 8:22 pm
I posted about emergency funds a while back, and I’d like to discuss the idea of emergency funds a bit further today. My question for today is: How big of an emergency fund is enough?
The answer, as with most things in “personal” finance, is different for everyone. I’d like to discuss a few of the main recommendations floating around though and then cover what my wife and I do.
Starting Out: $1,000
I think the first step in establishing an emergency fund is to pick a starter goal. $1,000 seems reasonable to me as a starting point, and would some unexpected car repairs, home repairs, or small medical bills. An alternative recommendation would be one month’s expenses, which would obviously cover a one-month job loss.
In my mind anything above this should be used to pay off debt. This is a bit of a personal choice too though, because if you have a big emergency you may find yourself borrowing again to pay for necessities. I would prefer to take this chance and pay off debt now rather than wait due to a chance of needing additional emergency funds. It’s a zero sum game anyway you cut it, so do what gives you the most peace.
Mid-level Emergency Fund: three months of expenses
I recently read a post at FreeMoneyFinance that essential said that for every $20,000 you earn it can take 1-2 months to find a job. That means the average US wage earner can expect a 2-5 month job search (potentially). Therefore I think three months worth of expense or three months worth of income is a good middle-of-the-road amount to have.
This recommendation, however, assumes that a job loss is something you want to prepare for. This is the primary “emergency” my wife and I would be concerned about, with the second probably being the need to replace the car I drive (which is 18 years old). Once again though it depends on your personal situation.
I’d also recommend that you carefully consider if you want to use monthly expenses or monthly income as the basis for your emergency fund. For a large number of people who struggle to balance their family budget each month perhaps the income option is a better one. As your income grows and your financial situation improves, you might consider switching from the monthly income method to the monthly expense method.
My goal for my family is to live frugally but well, which is not a contradiction for us because we don’t need a lot of stuff to be happy. My wife and I therefore work to get the maximum benefit out of each dollar we spend, and we hope to soon be able to live well below our means. This would make the “expense method” a better choice, and would accurately affect EXACTLY what we would spend over a specified period of time
Full Emergency Fund: 6+ months to one year of expenses
This what I am personally striving for (6 months), but for some of you it may be way too much or too little. I also tend to be very conservative when it comes to things like this, and with the hope of increasing the size of our family in the next few years. Given that and the fact that we will soon be a one income household I’d rather have a little too much emergency fund that have too little in case something pops up.
I also understand that this is an emotional journey. Two of the more common feelings are:
- “This is a LOT of money. I’ve never been able to save much before, and now you’re recommend that I save half a years’ pay?!?”
- “This is a LOT of money to be placed in a saving account (or similarly low-risk location. Wouldn’t it be better to invest this money?”
As to feeling #1, yes, this is a lot of money. Most likely thousands and thousands of dollars. And do you know what emergency’s cost. Thousands and thousands of dollars. An emergency fund is not supposed to protect you from every possible bad situation. But it should be able to insulate you, or reduce the blow should something unexpected occur.
To the second feeling I would say that risking your emergency fund is a lot like risking your family’s well being. If there was a food recall on beef you wouldn’t make you’re family eat beef because they could get sick. By living paycheck to paycheck without a financial buffer, you’re risking your family’s well being. Your financial security is non-existent, and a small bump in the road could result in numerous undesirable outcomes. Do what is best for you and your family and fund an emergency fund. Once you have such a fund in place you’ll never want to go back to the paycheck to paycheck world of worrying and financial insecurity.
Image Credit: didbygraham
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12 Responses to “How Much Emergency Fund Is Enough?”
Great post! I used to not be a big fan of having a huge emergency fund, but then I got married and have a kid on the way
! The size of a “good” emergency fund will definitely vary not only from person to person, but also as each individual goes through life phases.
At this point in our lives my wife and I are shooting for 4 months of expenses saved back. And we used the expenses method rather than the income method since we’ve been effectively living on a budget, and spending below my income on living expenses. Our emergency fund will assume cutting a lot of fat, which in my mind is a good idea anyways if I really do lose my job. And, I can find something (deliver pizza if nothing else) to subsidize that money and spread it out even longer if needed.
By Justin "The Night Trader" on Jan 26, 2009
Sounds like you’ll be well-prepared when the kiddo arrives. Do you know if it’s a boy or girl yet? We’re having 2 girls, due at the end of April.
By todd on Jan 28, 2009
Well explained, but I would add a little more. One problem that I notice is that we plan for normal expenses, but major repairs to the home or car are not planned for. I set at least $5000 aside as an emergency repair fund in addition to the emergency fund for living expenses.
By Frank Schulte-Ladbeck on Jan 28, 2009
Congrats on the girls! It’s boy and he’s due June 13th
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By Justin "The Night Trader" on Jan 29, 2009
We have a year of savings in our emergency fund and could probably milk another 3 months if we cut way back on our spending. Worse case scenario if my wife and I were both unable to work would be 15 months in savings. My goal is to have 2 years of savings by the end of 2009. I’m trying to get aggressive with cutting back this year and saving even more. It’s so much easier to sleep at night when you have a financial cushion to fall back on. It’s so tempting to buy investments right now, but I couldn’t stomach any further loses to our cash.
By The Passive Dad on Jan 29, 2009
Very good point frank. A little extra cushion would definitely help if multiple issues arise at the same time (which they tend to do)!
By todd on Jan 31, 2009
Re Todd’s comment
It’s important to distinguish between the different TYPES of efunds, too.
I personally have three (not broken up in different accounts, but seperate on my budget/net worth spreadsheets).
The first one is a ’small bump’ account – there’s about a month of take home in my checking account as I use the ’spend LAST month’s check’ technique for cash flow. It earns interest, but only a nominal amount. It’s for very small emergencies – like an unexpected vet bill or a medical expense that is not covered by either my insurance or my HSA guidelines. This would equate to Dave Ramsey’s “step one baby efund” or the “starting out” fund above.
The BIG efund is the ‘OMG, I lost my job!’ fund. It’s in a mix of high yeild savings (3 months) and laddered CDs (6 months) and it untouchable in my mind.
Then there are two midsized accounts – One for the house and one for the car. Used for repair bills, and eventually for a new (to me) car and house upgrades/renovations. This covers the roof, car transmission etc. These aren’t really EMERGENCY funds per se. You know your roof will need replaced, your car or washing machine or whatever will eventually die. You just don’t know WHEN. So these are more like an escrow account than anything. My goal here is to be able to replace my car with a late model used car every 5 to 7 years and to do a nice upgrade worth between 5 and 7K on my house every 3 to 4 years (next up – new furnace and AC!!!) The money for funding these is what I was spending at one point for a car payment and for CC debt servicing.
It would be fun to have more ‘play money’ in my budget, but having all my bases covered makes me feel better.
By karla (threadbndr) on Feb 5, 2009
We have 5 months in ours, working towards more like 8 or 9 months of emergency fund. We found this past year just how necessary these funds are when my wife went into the hospital for a month, and I had to take time off to be with her, etc.
Emergency funds. If you don’t have one yet, start one today!
By Pete on Feb 6, 2009
Emergency funds should be more than enough in my opinion since we can never tell the calamities and accidents coming in the future.
By Estate Tax on Nov 20, 2009