How Much of an Emergency Fund Do I Need?

by Kevin on April 9, 2009

We’ve talked about the importance of a proper emergency fund several times in the past. But what if you don’t know how large your emergency fund should be?

This is an area of personal finance I personally struggled with for a while in the past. How much is enough? Do I have enough to realistically cover us during an emergency? Have I put too much aside in savings — money that I could be investing or paying off our mortgage with? I changed my target several times as we went along.

Let’s look at both ends of the spectrum — just barely enough and probably too much.

Discover the Minimum Emergency Fund Coverage You Need

Finding out exactly how much money you need in savings is very simple if you have a budget. This is yet another reason why every single person reading this should have a budget. The budget tells you where your money should go. It will tell you where it typically goes, too, if you aren’t good at sticking to the budget.

This may sound basic, but let’s look at it this way: if your budget is based on $2,500 and $1,900 of that spending is in fixed, recurring, non-negotiable expenses each month that  is your starting point.

Another way to look at the above is that $600 of your $2,500 monthly spending is negotiable. It is stuff you could potentially cut back on if you absolutely had to due to job loss or some other type of emergency. That $1,900 is the minimum emergency fund coverage you need to pay for just one month’s spending. This is what I would consider the bear minimum coverage you would need for your emergency fund. One month is really not a lengthy time period and you would need to recover your income very quickly to not burn through the entire emergency fund shortly.

Again, $1,900 is what you would absolutely need to make ends meet every month. In an emergency you are likely to cut back to this number. Since this is one month’s expenses you will simply multiply that number by how much months of emergency fund you would like to have saved up.

Do You Count Your Emergency Fund in Years Rather Than Months?

This is the polar opposite of having a tiny emergency fund. If you’re counting your emergency fund in more than one-year increments that might be too much. In fact I would say that unless you are super conservative having two or three years in emergency funds is way too much. However, you would probably rather be on this side of the fence than just having minimal emergency fund coverage. But you are likely missing out on higher returns for the funds if you were to use them elsewhere.

Let’s go back to the original example of $2,500 spending with $1,900 being relatively fixed expenses. If you have two years of expenses saved up you are looking at $45,600 (24 months x $1,900). Sounds like a lot of money to me.

If at the same time of having this huge emergency fund you still had consumer debt or a mortgage you are missing out on lowering your interest paid. You could be missing out on investing that money which in the last year may have been a good thing. But not every year is like last year in the investing world.

Maybe you are really conservative, but I think two years is a tad bit too much.

How Much Emergency Fund is Necessary?

The typical rule of thumb is three to six months of expenses. But I would challenge you to not rely on a rule of thumb alone. Your personal situation is more important than the rule of thumb.

Emergency Fund for Singles

For singles you have no one else to rely on but yourself. Three months might not be enough coverage for you especially in a tough economy. Perhaps six months should be your first goal and then over time grow that to twelve months due to the higher risk of losing that one income.

Emergency Fund for Married with One Income

This is essentially like being single. If you are a one income family, you probably have kids. Three months is definitely not enough of an emergency fund for you. Again I would target 6 to 12 months for your emergency fund.

Emergency Fund for Married with Two Incomes

When you are married and have two incomes you have a bit more of a cushion against financial disasters. It is highly unlikely that both individuals will lose their income at the same time. So that $1,900 minimum expenses you have might be covered by just having one income. You live, save, and invest on the other income. In fact I discovered a while back that our emergency fund was larger than we thought.

In this case 3 months isn’t a bad target to go after. Of course the more the merrier, right? So don’t stop once you hit three months. Just breathe a little more easily and go on with life.

Adjust Your Emergency Fund Calculation Periodically

The last thing I want to mention is you will need to recalculate your bare minimum expenses periodically. One year it might be $1,900. The next year it could be $2,200 due to rising costs or life changes. You don’t want to find yourself in a situation where you think you have six months of funds saved up, but in reality it is now only two months of expenses. Not a good place to be. Check your budget annually or semi-annually to make sure you are still on track.

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Baker @ ManVsDebt April 9, 2009 at 6:48 am

Great post providing some tips for people to consider when deciding how much is right for them.

The biggest part I struggle with is what kind of emergency fund to save for while getting out of debt. That’s a whole different ball game!

The Weakonomist April 9, 2009 at 6:55 am

I have two formulas for emergency funds.

The first is simple: The distance of coverage you need is tied to unemployment. Unemployment is currently at 8.5%, so you want 8.5 months of expenses saved. This accounts for the increased difficulty in finding work of one’s job is lost. You can adjust this regionally if you want.

The second is more complicated, and also conservative. 10% of before tax income for each working member of the family. 5% of before tax income for each non-working family member (stay at home parents, children, etc). 1% of before tax income for each pet.

In this example a working family of 4 with a dog making $80,000 a year would want 8k+8K+4k+4k+800 = $24,800 in emergency funds. Like I said it’s conservative but I don’t ever want my family to worry about money. You can’t always expect to get the fund up this high, especially if paying down debt, but in my world it will be a goal.

Final note: I’m currently single and meet the first metric and am working towards the second one. I’m getting married this fall and I hope to get to the second one for myself and my new wife by this time next year or so.

Fabulously Broke April 9, 2009 at 6:59 am

This a great post detailing how to figure out EFs, but for me as a freelancer, I have more than a year saved as an EF because I could potentially go a year without a contract. 🙂 I understand that keeping more than a year is wasting its potential but I cannot afford to NOT be liquid to make my rent.

@Baker: While getting out of debt, the VERY BARE minimum to save is $1000, but I’d say 3 months of EF is the true minimum unless your job is v. secure and high paying (the way mine was when I only kept $1000), but this is all in conjunction with REALLY chopping your expenses, cutting out anything but v. cheap food, shelter and keeping warm.

When I was in $60k of debt, my regular EF was $1000, but I also had only $500 in fixed expenses (my debt repayment amount for student loans) because I lived out of hotels and ate for free as I travelled everywhere and stayed in the city (on company dime).

Now, I’m 100% out of debt, but my EF has increased to 1.5 years (as I work for myself now), but my regular expenses (fixed) are $1000 a month.

Good luck.

-Fabulously Broke in the City

tom April 9, 2009 at 12:25 pm

Another thing to consider is that it seems like emergency funds are a new discovery but really they aren’t, they should be a basic necessity for us to have.
However with the inflated market over the last few years, people thought things can only get better.

Personally, I keep around 2 months of living expenses saved up while living at home and I build that each month by contributing almost a months worth of living expenses from my income.

Rainy Day Pennies April 9, 2009 at 1:10 pm

My take is emergency funds are more dependent on your career path. I’m a technology worker, and work in a field where layoffs are frequent and often occur without advance warning. Therefore, my emergency savings are higher than average. Someone with a stable career path where layoffs are few, like a teacher, can get by on less.

Do You Dave Ramsey? April 9, 2009 at 2:16 pm

This is good information Kevin. I think there’s much to much whining about the size of an emergency fund… is it months of expenses of income… all are veiled excuses for simply not taking action.

You’ve helped remove the excuse… it’s a good idea so just do it. We can (and should) always tweak it but why not get started?

Thanks for making us think!


SeekingLemonade April 9, 2009 at 4:17 pm

I look at it this way: If I became unemployed today, how much money would I need to live on until I get a new job?

My answer is two parts:

If I didn’t need to spend everything I have by the time I get that new job, it means I had enough savings.

If I spent everything and I still don’t have a job, it means I did not have enough saved.

Diane April 9, 2009 at 9:23 pm

Unemployment payments are something I have not seen addressed in this calculation. If you are eligible to receive unemployment payments should you lose your job, that might be something you’d want to take into account.

If I have $2000 per month in fixed expenses, and I would receive $250 per week in unemployment, that would nearly double the time my emergency fund would last, as I’d only have to use $1000 per month from savings.

I currently have about 6 months of expenses in my e-fund, if I had to cover all household expenses without unemployment or any help. However, I share my house with a boyfriend who pays expenses, and I would receive unemployment if I lost my job. I could probably survive nearly a year with my current emergency fund.

TStrump April 11, 2009 at 7:06 pm

I used to think 6 months was enough, but the way the economy is going I have to wonder if a year is more appropriate?
Anyways, I also keep a few empty lines of credit around just in case.

Kevin April 13, 2009 at 10:54 am

LOTS of great discussion here. Thanks for being such a great community!

@Baker: Very true. I say get maybe a month or whatever you are most comfortable with (every situation is different) and then knock out that debt.

@Weakonomist: Wow, that really is conservative. I wouldn’t want that much saved up while paying off debt.

@Fabulously Broke: Yes! Working as a free lancer is a lot more risky than a “regular” job — you need that much saved up.

@tom: You are exactly right. “Housing values only go up!” “The market only goes up!” Both were very common thoughts. Now we seem so shocked that it just isn’t so… and now having to make adjustments.

@Rainy Day: Somewhat true… a doctor might not need as many months expenses saved up… not so sure about teachers. In our area some teachers have been laid off due to lack of funding.

@DYDR: Definitely better to start now and figure it out later. Saving money never is a true “problem”.

@Seeking Lemonade: But the question becomes how do you figure out how much is too little/too much without running the math?

@Diane: True I didn’t count in unemployment benefits. I don’t think you should count on them at all! I would rather be self-sufficient in my emergency time than try to calculate how much I would get in unemployment. I’m not saying I wouldn’t take unemployment — that is what is there for — but I wouldn’t calculate it in to my equations. Would just be an added bonus.

@TStrump: It depends on your personal situation… single vs. married, kids vs. no kids, really stable job vs. unstable job, etc. I wouldn’t count on lines of credit necessarily — you’ve got to pay them back eventually and there is no guarantee your lender won’t clash your available credit right before you need to tap it.

Obaba May 2, 2009 at 6:41 pm

I have 3 years in my money market account, which I can withdraw easily. Some are in CD ladder. Considering sometime cash can out perform any class of investment, like the last year, it is a diversification to have more in cash accounts.

Of course, I have only 20% in cash, and 80% in stocks, ETFs, and funds.

Kevin May 3, 2009 at 1:31 pm

@Obaba: That’s pretty conservative, but I bet it paid off over the last year and a half.

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