How Much Do You Really Need in Your Emergency Fund?

by TTMK on February 4, 2013 · 16 comments

If the process of making money followed a Hollywood script, we would start our career at an entry-level job, then dazzle senior management andEmergency Fund skyrocket straight up to the very top corporate ladder.  There would be nothing but uninterrupted success along the way, and wealth would accumulate to give us the opportunity to live a dream life, and the prestige of being a true mover and shaker.

For a few folks, that does happen.  But for the vast majority of people, the ascent up the corporate ladder stops at a certain high up rung.  For others, they’re thrown off the ladder somewhere in the middle.  Yet others don’t even get a chance to get on the ladder, while some have no interest or inclination to do so.  Clearly, we all have different experiences and paths that we take.  Often times, this happens no matter what the true intentions that people may originally have.

Life isn’t a linear path upward to superstardom for all – instead, it has its ups and downs.  Hopefully the ups predominate, and we’re always pushing and striving to be trending upward!  But we need to be prepared for at least the chance that something could happen, and this is especially important with our finances.  Accordingly, it’s smart to have an emergency fund.

Of course, this isn’t news to you.  The topic of having an emergency fund is one that’s very often discussed on personal finance blogs.  People often make clear that it’s really important to have one, the consequences of not having one, how you’ll be thankful you did have one, and so on.  Then there’s the question of how much to have in an emergency fund.

Yes, that’s talked about quite a bit too.  Most of the opinions I’ve read have centered around making sure that you at least have something, and ideally 3 months of expenses.  Maybe 3 to 6 months in some cases.

Well, I take a little bit more conservative view – in the sense of being careful to have more than that in an emergency fund.  I think it’s a good idea to go for 6 to 9 months of expenses, and even up to 12 months in an emergency fund.

I think that most people might not really agree with this for a variety of reasons.  One being the notion that financial emergencies won’t last that long, and that they’ll somehow be able to avoid being in distress for that long.  Others might scoff at tying that much money in a low-interest vehicle, as the money could be invested elsewhere for a higher rate of return.  Long-term stock market rates of return sure have been better than what people earn these days in savings accounts, so I can see that!

Nevertheless, I think it’s not a bad idea to at least work toward that 6 to 9 months amount.  If you can cover that many months of expenses, your “sleep well at night” factor will be a lot higher.  Let’s face it, things can and do happen to people.  Jobs can be lost in a flash, but it can take quite a bit of time to find a new one.  People get sick all of a sudden, get divorced, have emergencies, or simply find themselves facing unexpected home or car repairs.  These costs can add up, but even if there is only one problem that occurs, it could be quite expensive.

What do you do if you had a modest emergency fund run out? Start charging more on a credit card? Frankly, having a solid emergency fund is a good step toward trying to avoid debt in life.  Borrow from family or friends? Sell assets for less than value?

None of those sound like too much fun.  Since we can’t really predict whether or not something will happen, and what it would entail if it did, why not protect ourselves with a bigger financial cushion?

My Questions for You

Is an emergency fund a priority for you?

What do you think is a good number of months of expenses to keep in an emergency fund?

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{ 16 comments… read them below or add one }

Michelle February 4, 2013 at 8:31 am

We have around 6 months in our emergency fund. I do like having it because it gives me peace of mind.

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TTMK February 4, 2013 at 8:35 am

Michelle – that’s great. I can understand how peace of mind can be really important.

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Christopher @ This that and the MBA February 4, 2013 at 9:32 am

I wish we had a decent emergency fund. We are about 2 months now. Student loans, kids, mortgage…just like everyone else it is hard to build up a decent savings…we are making progress but its slower than id like..

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TTMK February 6, 2013 at 9:42 pm

Christopher – it can be difficult, I know. Especially with so many expenses, and other uses for cash. We all have to keep pushing forward. Actually, at 2 months you’re way ahead of the average person I would think.

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Edward Antrobus February 4, 2013 at 1:06 pm

I’ve been doing the mini-emergency fund advocated by Ramsey but I’m going to bump that up to $3000. Once the debt is paid off, I’ll probably go whole-hog and do a year’s worth of expenses, plus extra in case an emergency happens while I’m out of work. Because emergencies NEVER clump together. :)

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TTMK February 6, 2013 at 9:41 pm

Edward – yes, there can be conflicting needs for our money. Debt demands attention obviously, as does an emergency fund. Great to see that goal of one year’s expenses, since you just never know what can happen – or when.

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Leigh February 4, 2013 at 11:06 pm

An emergency fund is a huge priority to me. I like having a large cash buffer. I keep my car, condo, and health insurance deductibles set aside in cash, as well as the full replacement cost of all of my appliances, and six months’ of expenses. It really helps to sleep soundly at night. Plus I know that it’s easiest to build up the nice cash buffer when I have good cash flow now than when I need the large cash buffer.

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TTMK February 6, 2013 at 9:39 pm

Leigh – I REALLY like your line of thining here. Gold star :)

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AverageJoe February 6, 2013 at 8:12 am

I do worry about my emergency fund. When I was an advisor, much of our discussion around emergencies had to do with a few things, including the client’s view of an emergency and the nature of their career. Depending on those discussions, our emergency fund strategy could vary wildly….from several weeks worth of coverage to over 12 months.

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TTMK February 6, 2013 at 9:39 pm

Average Joe – It would be interesting to understand how client views on emergencies could be different. That would be a compelling blog post, at least to me :) It’s fascinating to me how people could simply believe that nothing will happen to them, or 1 month of expenses could be enough. The rationalization behind such views would be interesting to learn.

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Goldeneer February 6, 2013 at 8:54 am

Since we have a lot of rental properties and therefore we’re highly leveraged, we need a higher emergency fund than most. I calculated our emergency fund to cover our costs for 12 months, have 2 vacant properties for 1 year OR have excessive tenant damage and 1 year vacancy.

We have split our emergency fund into 2 accounts. We keep $10k in our regular account for day to day emergencies while the rest is always available from a line of credit. We use a line of credit instead of keeping equivalent cash in a savings account since we save more money by putting our extra cash in mortgage repayment than in a savings account.

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TTMK February 6, 2013 at 9:37 pm

Goldeneer – the idea of needing a higher emergency fund in your situation, based on what you just described, makes sense. You just never know with rental properties, it’s a less controllable element of cash flow.

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eemusings February 7, 2013 at 3:42 am

Honestly, I feel like no matter how big our EF, it’s never enough. Ya know?

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TTMK February 9, 2013 at 4:51 pm

eemusings – I know. Totally agree! :)

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My Wealth Desire February 13, 2013 at 4:12 am

Yes emergency fund is important especially if you want to start early building your wealth. The rule of thumb is at least 6 months of our monthly cost of living.

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TTMK February 13, 2013 at 8:40 pm

It’s important, as losing money can really set someone back.

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