Your Emergency Fund May Be Larger Than You Think

by Kevin on February 6, 2009

Talk about some good news for Friday! Your emergency fund may actually be larger than you think it is. How is that even possible? Let’s take a look. (Oh, and this primarily applies to married folks or anyone that is sharing income with someone.)

For stuff like this I always find examples are best in helping encourage understanding.

Your combined family income is $4,000 ($2,000 each) per month after taxes. Your minimal living expenses are $3,000 per month.

Let’s say you have 3 months of expenses saved up in an emergency fund. That’s $3,000 of expenses x 3 months = $9,000. That’s a solid start, but you would really like to get it to 6 months.

Before you can grow the emergency fund any more, you lose your job. $2,000 worth of income disappears from the budget. Don’t panic. This is what emergency funds are for. You’ve got three months to find that next job and get your income back to normal.

But, wait. You’ve got more than three months.

How is this possible?

Your emergency fund is for an absolute emergency. You have 3 months worth of full expenses saved up. Three months of full expenses assuming you have no family income.

This is key. If only one spouse loses their job, you still have half of your family income. Instead of losing $4,000 of monthly income, you’ve lost $2,000. This is much better news.

If your expenses are $3,000 per month and you still have $2,000 of income coming in, you only are going to burn through $1,000 worth of your emergency fund each month. That three months worth of income ($9,000) is now 9 months worth of savings.

You’ve just tripled the length of your emergency fund. Congrats. (Now get back to work!)

The amount of time that your emergency fund extends to will depend on how much income is lost from your total family income. If your spouse makes $1,000 and you make $3,000 the impact to your budget and emergency fund will be much larger if the higher earner loses a job. If the lower wage earner loses a job and you still have a proper emergency fund built up, it should last a little bit longer.

This should not be used as incentive to minimize your emergency fund. I would still save up 6 months worth of full family expenses in case disaster truly strikes. But know that if you are still working on that fund and one person loses a job things aren’t as bad as they seem.

{ 3 trackbacks }

Dollar Frugal » Blog Archive » Carnival of Personal Finance - Wizard of Oz Edition
February 9, 2009 at 5:11 am
Good PF blog entries from around the web « Monogamoney
February 10, 2009 at 7:15 am
Good personal finance blog entries from around the web « Monogamoney
February 10, 2009 at 7:15 am

{ 1 comment }

Do You Dave Ramsey? February 14, 2009 at 12:50 pm

Great article on the mechanics of an Emergency Fund. If I may…I’ve created a Contingency Budget tool that helps walk through the steps for expanding an Emergency Fund and in a buyout article I commented on the power of a payout (or defacto Emer Fund) residing in its ability to buy time with little regard to the actual dollar amount. By simply getting healthly, your Emer Fund requirements can drop significantly.

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