Emergency funds, like most things are not “one size fits all”. Hopefully my emergency fund guide can help you decide just how much cash you should keep on hand. It can be argued “the bigger the emergency fund the better” but this simply isn’t true. Cash value deteriorates over time (thanks inflation) as a result $1,000 today may only have the
spending power of $700 in 10 years. It’s much better to put away what you need for your situation, no more, no less.
#1. FIRST YOU NEED A BUDGET
Step 1 to figuring out how much you’ll need to save if figuring out what your monthly expenses are. There are a number of budget templates available online. For me I prefer a good old excel spreadsheet. I simply list all my outgoing expenses and group them based on “Mandatory expenses” and “Flexible Expenses”.
“Mandatory Expenses” are things like food, housing, utilities, car payments, etc. These are the necessities and I can’t eliminate. “Flexible Expenses” are things I could eliminate inside of 24 hours. Eating out, cable, clothing, vacation, even child care and student loans could fall into this category as they can be frozen.
Your emergency fund should be based upon your Mandatory Expenses. If your normal outgoing expenses are $5,000 a month and you suddenly lost your job, you could cancel your cable, stop saving toward that vacation, no more eating out, put your student loans in forbearance. Suddenly your $5,000 outgoing expenses are down to $3,200. You’re spinning tires, but that’s okay, we just need to get through these times.
#2. FIGURING OUT WHERE YOU FALL
As I first mentioned, emergency funds aren’t created equal. Should the guy trying to start his own business have the same emergency fund and the nurse down the road? Probably not. Nursing is a very in demand job with less risk of losing income vs starting a new business.
You also need to understand there are emergencies outside of just losing your job. Are you young and in good health? Great, you may need a slightly smaller emergency fund then someone who’s older and in not the greatest health but has the same career as you.
#3. $1,000 EMERGENCY FUND
This is the bare bones. We’re talking fresh out of college, living on your own, trying to make ends meet, living on Ramen noodles. If your worst-case scenario situation is you have to move back home with Mom and Dad, you might be able to get away with $1,000. This is more a mistake fund then an emergency fund. You accidently run a stop sign and get a big ticket. You drunkenly spill wine all over your laptop. You’re young and have very little to lose, so you can sneak by with a small fund.
#4. 3-4 MONTH EMERGENCY FUND
This emergency fund is for a married team who typically live below their means, both work, and at least one person has an extremely stable job.
My wife and I fall into this category as she is a union government employee earning six figures. We can live on her salary alone. Short of her murdering someone, it’s almost impossible she would ever lose her job. I am in finance sales, my job is no more or less secure than any other job so long as I preform.
We’re still young, healthy and have no children. We can get by with a 3 month emergency fund as it would be less about loss income and more about covering a true emergency like needing to replace the roof our the house. Again, this isn't a rule, just an emergency fund guide. If you're in a similar situation and uncomfortable with just 3-4 months, by all means add more!
#5. 5-6 MONTH EMERGENCY FUND
I imagine most people would fall into this area. If both people in the household work full time you can usually get away with a 5-6 month emergency fund. If only one person in the house works but it’s a very stable job like a nurse, government employee, tenured teacher, etc. Or even if only one person works but they have a very in demand job, you would likely fit in this emergency fund.
Nine times out of ten you’re going to be in good shape if you can put together a six month emergency fund.
#6. 9-12 MONTH EMERGENCY FUND
If you are single and your job isn’t very secure I suggest trying to save up 9-12 months worth of expenses for your emergency fund. It always seems that when it rains it pours and sometimes finding a new job isn’t easy. If you find yourself out of work, and suddenly your refrigerator breaks what would you do? Chances are you’d have to put the fridge on a credit card, and that’s the last thing you want to do.
I also recommend this for a couple with kids where only one person is working and the other person is stay at home. I’ve personally gone through a job loss that took 10 months before I could find work. Luckily the first few months came with unemployment and my wife’s salary could cover the rest, but what if you didn’t qualify for unemployment and had no secondary income.
#7. 12+ MONTH EMERGENCY FUND
This is really for those self-employed people. You’re taking on a lot of risk for hopefully a very large reward, but you need to be realistic that it may not work out. Self-employed do not quality for unemployment in most cases, having a failed business also doesn’t look very good on a resume. Finding a job after trying to start a business can be extremely difficult. Without unemployment to help out, you have to consider the possibility that you could be without an income for an extended period.
#8. ADD A MONTH
I also recommend adding a month if you have certain situations. If you have children you should probably add at least 1 month. If you aren’t in the greatest health, add 1 month. If you just purchased an old home, add a month. If you’re over 55, add 1 month.
You’ll have to look at your exact situation and decide if you should be adding a little time to your emergency fund. Again, this is just an emergency fund guide, it’s not one size fits all and it’s just to help paint a picture on what you should realistically be saving.
If you’re married, 32 with no children, and in good health then you may just want 4 months. If you’re married, 55 with 3 children and high blood pressure, you may want 6-7 months.
#9. DON’T INVEST YOUR EMERGENCY FUND
This probably goes without saying but it’s worth mentioning. In 2008 during the great recession people lost their jobs, their homes and their investments damn near overnight. If you lose your job and your home value suddenly plummets and you’re upside down on your mortgage, all you’ll have is your emergency fund. If that is in a plummeting stock market you’re going to be in very bad shape.
Yes, inflation will chip away at the security deposit and that sucks, but just look at it as insurance. We pay insurance on our homes, cars, health, etc. This is money that just vanishes and hopefully we never have to utilize that insurance, but we pay it without a second thought. I look at inflation chipping away at my security deposit as insurance. It’s the insurance to know I can handle things when shit hits the fan, and it’s why I sleep good at night.
Do you agree with this emergency fund guide? Do you think people should save more? Should they save less? Comment below...
