How Much Do I Actually Need in My Emergency Fund?

DesiraeEmergency Fund, Saving25 Comments

Yesterday I had a post up on Millennial Money Man, breaking down why increasing your savings rate isn’t just useful for early retirement! If you’re new here thanks to that post, welcome, and if not, make sure to check out the post and send M$M some love!

how-much-in-emergency-fund

Back to what appears to be my current favourite topic: emergency funds. As I mentioned when I broke down how emergency funds make getting fired way better, today I’m going to be tackling the age-old question.

How much do I actually need in my emergency fund?

I think I’m closer to Average Jane than Pro-fresh-ional Personal Finance Blogger when it comes to my emergency fund, considering that literally as I write this sentence, I don’t have a set goal for my emergency fund.

Why?

I just never sat down to really look at it.

Consequently, I have no idea how much I really need to save in it.

Whoops?

Don’t get me wrong, I’ve always contributed to it monthly, and it has saved my butt so many times, including my recent $458 lesson in how to adult properly. But it’s never been like, a planned, intentional kind of thing.

For a while, I even used it as my catch-all “short term” savings account, which let me tell you, is how not to start an emergency fund.

So if that’s the boat you’re in, welcome. We can do this together. For all my super-duper responsible friends… I’ll see you on the other side.

Here are the three questions I’m working through to set an appropriate emergency fund goal.

1. What’s your emergency fund for?

This seems like it should be an easy one. Emergencies, duh.

But some people take a really hard line on this. They’ll tell you that emergency funds are for something catastrophic that causes a multi-month loss of your regular income, like getting fired or a sudden illness. That is an amazing, worthy, worthwhile stance, and if you’re going for an A+, this is what you should aim for.

However.

What if I want more of a solid B+ or an easy A at this stage of my life? What if I want a bit more flexibility in terms of what my emergency fund is really for?

Personally, I think that’s OK, especially when you’re in your 20s.

In an ideal world, yes, you would have separate savings accounts to cover every potential setback, like car repairs, or a $458 ticket for forgetting to renew your license plate. But when you’re in the middle of the most expensive decade of your life, and you’re trying to balance multiple savings goals, maybe some wiggle room is called for.

That said, calculating how much you want in your emergency fund will need to take this into consideration. If this account is only for covering your costs for a set number of months, it’s easy to calculate. If, on the other hand, this also might be your “The air conditioner broke down and it’s a billion degrees in here” account, you should add a little extra.

My Emergency Fund Answer

I’ll be drawing on this account to cover big unexpected expenses that aren’t already planned for in other accounts. I’ve got accounts to cover big home purchases, doggie emergencies, vacations and gifts, so my emergency fund is officially for:

  • Unexpected car expenses
  • Loss of income for a few months

2. What might an “emergency” cost?

Before I get into the loss-of-income side of the calculations, I’ll take a look at what my unexpected car repairs might look like. There are three kinds of car issues I consider emergencies: major accidents, unexpected repairs and simple mistakes that end up costing an arm and a leg.

  • My current car insurance has a $500 deductible, but I’ll be switching that to a $1000 deductible when it comes up for renewal in April. I’d like to be able to “self-insure” for a bit more than that, so for major accidents, I’ll aim for $1500 in my emergency fund.
  • I’ve got another 10,000KM before my next major service appointment, but given my experience with those, they’re when the big expenses tend to pop up. I’d like to save $2000 in my emergency fund specifically to cover things like replacing the brakes in the vehicle, if and when it comes to that.
  • Lastly, I’ll add $500 to cover the unexpected things that pop up, like the $458 reminder to renew my license plates.

My Emergency Fund Answer

I’ll be tacking on $4000 to my emergency fund goal to account for the fact that it’s my backup for car repairs.

Now to calculate how much I want to save in case I lose my income.

3. How much do you spend every month?

I’m a huge proponent of tracking your income, because you could be spending $4000 a month and have no idea where all the money went. This is a true story, by the way, as I learned when I looked back at my Mint reports for the past year. Last February was a $4000 month, and I couldn’t tell you a single thing I bought in that time. And February is barely even a real month for crying out loud.

As they say, knowledge is power. And until you know where your money is really going, it’s hard to make any kind of adjustments or improvements. You might think you know what you’re spending, but you could be wrong.

you-could-be-wrong-track-your-spending

Once you do know, though, it’ll make calculating an emergency fund goal easy peasy. All you need to do is choose the number of months you want to be able to sustain your basic needs, multiply it by the amount you spend on average each month, and if you want to be generous, assume you’ll spend 80% of your currently spending level, because you’ll be all jobless and stuff.

My Emergency Fund Answer

As an average figure over the past few months, even with some unavoidable expenses, I’ve managed to keep my spending hovering right around the $2000 mark each month. I’d like to have my emergency fund cover 3 months of expenses to start with, and giving myself the 80% grace calculation, that brings me to $4800.

 

So, what’s my emergency fund goal?

Given these calculations, my current emergency fund savings goal is $8800.00. I’m really glad I did them too, and here’s why.

Since I have an undying love for spreadsheets, I built one to track how my current savings rate will play out over the next few years towards my different goals. Once I hit $5000 in my emergency savings account, I did some quick spreadsheet magic and had that monthly amount transferred to my house downpayment fund, effectively capping my emergency fund and marking it as “done” in my future mind.

But clearly, that was a bit of spreadsheet magic I should have skipped.

Taking a clearer look at what an emergency fund means to me, and what I’ll use it for, gave me a much more realistic number to work towards, and that means keeping up my monthly contributions until I hit that $8800.00 number.

That’s ok, because when an emergency comes around, I’ll be happy we had this chat.

What about you – are you an A+ personal-financer and have a fully funded, untouchable emergency account? (I’m so excited for you if you are, and you should be immensely proud of that!) Or are you still working towards one like me? Let me know!

 

25 Comments on “How Much Do I Actually Need in My Emergency Fund?”

  1. Sofia @ Currentlylovingsimplicity

    My emergency fund is for living expenses (although this is a somewhat moot point in my case, as I am still in medical school and fortunate enough to be fully supported by my parents) and for emergencies like stolen bikes or phones, or broken laptops, or worst case scenario, all three in one month. Which means I should probably have at least 2700€ to cover that worst case scenario. I recently reached that goal, so now on to saving for living expenses…

    1. Des

      Congrats on reaching the goal – that’s a big deal! I remember having to replace a laptop while I was in school, and it was not fun – but it was also incredibly necessary. If I’m remembering it right, I went straight from school to the Apple store, haha. There isn’t really a buffer period when you’re in the middle of classes and assignments and exams, which I can only imagine is even more true of medical school :)

  2. Naomi @RisingNetWorth

    We’re about 1/2 way to meeting our emergency fund goal of 6 months living expenses. Once achieved we’ll utilize this money if we were to ever have a life altering event or job loss. It’s important to remember that short term disability, maternity leave and bereavement only can sustain you for so long. Having that bonus net that many others don’t prepare for gives you way more flexibility in life.

    1. Des

      Yes, yes, yes! I couldn’t agree more – even though people always claim that employment insurance or short term disability will be their emergency policy, there are just so many variables to it. I know up here in Canada we have different options available to us, and some that are really generous, but even so, it never hurts to have the extra emergency funds just in case. My favourite example is to ask people how they’d manage four weeks without pay – which is about how long it takes for employment insurance to kick in here if you get let go. The look on their face is priceless when they realize. I’m sure I’ve scared tons of people into saving a bit extra, haha.

  3. Alyssa @ Generation YRA

    I love this breakdown! You really have your goal down for your emergency fund, which makes it much more tangible to work towards. :) Just like your last post, I commented & touched on how I also may recognize my emergency fund as my “opportunity fund” as well! I think I am a bit more lax when it comes to what I am saving for, just because I know in 3 years life can be drastically different (hence why, having an emergency fund is key)! I think you touched on a great point where your 20’s are definitely ex-pen-sive. Sometimes I feel like I have so many savings goals (emergency fund, retirement, house down payment fund, wedding, kids future tuition) that it becomes a bit overwhelming! I keep reminding myself that even if it seems challenging now, once I get through my 20’s building these foundation funds & working towards such goals will allow for my 30’s and on to be a lot more smooth sailing. To me, my emergency fund will always be a work in progress because I am unsure of what the future ’emergency’ may entail – but might as well be prepared! :)

    1. Des

      Yes! I’m so glad I’m not the only one who’s sitting here like “Wait, I have five different savings goals and I STILL don’t have a savings account to cover car emergencies?!” It can definitely get overwhelming, so thank you for being there with me! I also take comfort in daydreaming about my 30s when all of these accounts will be fully funded and I’m set up to have no debt, haha.

      And honestly, the work in progress thing is so real. I’ll probably hit the $8800 goal the same year we buy a house, and then realize how expensive house emergencies can get, and bump it right on up to like, $12,000. C’est la vie!

  4. Sarah Noelle @ The Yachtless

    Hahahaha, oh, Mean Girls. Seriously one of the funniest movies ever.

    Well, not only is this a great post, it exactly speaks to the question I was wondering about when you posted last week about emergency funds and getting fired and the license plate situation. I guess I’ve always heard $5,000 as a rule of thumb for a B+ emergency fund, and $10,000 as the A+ version (not sure how Canadian/U.S. exchange rates factor in here). It makes a lot more logical sense, though, to base your emergency fund on your actual expenses, or actual potential expenses, as you have done.

    I have $5,000 in my emergency fund right now, but I also don’t have a car. Then again, I also won’t have a job after December 31st, because that is what happens when you finish your PhD. So I’ve been thinking lately that $5,000 may be a little low, as I’m not sure I’ll find the perfect job right away and I typically need about $1800 (if I’m being careful) to live and pay rent and buy groceries and toilet paper in a given month. There’s not a lot I can do about that now (since it takes a while to build up an emergency fund)…except to be really vigilant about looking for jobs!

    1. Des

      Hahaha I’m pretty sure we just ignore exchange rates and use the exact same amounts, because I’ve heard the $5000/$10000 breakdown as well! It’s funny when I look at it that way, because my goal puts me at a solid A, which I can totally accept.

      Also, can I just say, AS IF you have a PhD? That is the coolest, and the most impressive. You’re a doctor! I’m excited to see how your job search goes and I know you’ll find something exciting and amazing.

  5. Taylor @ Freedom From Money

    Super interesting! I love how you broke it down and explained your process. I don’t think people talk about this enough to be honest. For me, the answer was simple. I’ve saved 3 months of living expenses. I don’t have any other funds or accounts, but I do have about $3000 worth of cash available via credit cards, plus an additional $20,000 worth of credit available. So in the case of a true emergency, I would still have access to additional money. I chose three months because I know that if I lost my job, I could get some sort of job in that time. (I also know I could cut my living expenses even further, if I needed to). Most months, I also add an additional $200 to my savings accounts. But if I need to spend the $200 on something else (like in December, I’m planning an extravagant birthday for my partner!), then I don’t stress about it too much. Other than that, I funnel the rest towards my student loans. I’m interested to see how my financial goals change once my loans are paid off in March though!

    1. Des

      Oh birthday parties are the best! I went way over the top for my boyfriend’s 30th… and then told him that next year he was getting a book, lol. You must be so excited for your partner’s birthday to finally get here! (I mean… no, planning birthday surprises is about the recipient, not about us…)

      I totally agree on the job front too. After two months, if I didn’t have a new job, I’d probably just pick up a retail gig or something flexible to do until I found something else – I’d go stir crazy otherwise! There is only so much Netflix a person can watch.

      Lastly, March is SO SOON! Taylor! That is the most exciting!

  6. Rue

    Man, this is like the kick in the butt I need to really look at my priorities. Right now, I have everything going into debt repayment, which is not bad, but I should reaaallly be saving some too.
    I guess my way of looking at it is that I’ll have all of it to save once I finish my debt but considering I’ll need a good amount to fix my car before I can even use it…
    I suppose step 1 is to follow your advice and figure out what my goal is first.

    1. Des

      Goals are always the best place to start – what works for you might not be what “the general advice” is! I know I’ve heard so many different, conflicting things about how to manage debt and savings, and I think what it really boils down to is what matters most to you. If carrying debt is a serious stressor, then your current strategy might be the best one! But maybe setting aside a chunk of it for other priorities would be able to help you feel a bit more relaxed about those? Oh adulting, it’s never easy, eh?

      I hope the post was more gentle-kick-in-the-butt and less “Egads, what now?”

  7. Our Next Life

    Great advice, as always. For the longest time, we followed Suze Orman’s advice to have a full eight months of living expenses in our emergency fund, which we did eventually save up. But it was a lot. of. freaking. money. On one hand, that made us feel bulletproof, which was cool, but on the other, that’s a lot of freaking money to be earning basically 0% interest on. I wish Suze Orman spent more time talking about reducing your spending — then we might actually have thought about reducing how much we’d need in those imaginary 8 months and not tie up so much cash in a savings account. Oh well… We do plan to still have an emergency fund when we retire early, too, so that we aren’t forced to sell shares in a bad market or incur capital gains that would mess up our tax/health insurance situation. We highly recommend that approach!

    1. Des

      That’s so smart – and I never realized it, but spending less really isn’t something Suze ever covers! I’ve read a few of her books and you’re totally right, I don’t remember anything prominent about that beyond some advice about the “right” ratios of what to spend and what to save.

      And honestly, that is a brilliant and well-planned approach to early retirement! Unsurprising coming from you guys, *but still*. Kudos!

  8. Penny @ She Picks Up Pennies

    Fully funded but it’s lumped in with the rest of our savings, meaning that we only have one account for e-fund and other savings. In terms of what it is for, goodness only knows. Home disasters, car catastrophes, being laid off. I’ve always had $10k as a number in my head that I would keep untouched. I read a lot about different ways to calculate the proper amount, but $10k just *feels* comfortable. Because you know, everything in the finance world should be based on the feels. 😉

    1. Des

      Hahaha I love it – when I run out of numbers to rationalize my decisions, feelings are an excellent fallback! No one can argue with feelings. Plus, your feeling gives you a VERY solid emergency fund!

  9. Maggie @ Northern Expenditure

    Ours is a worst-case scenario three months of living expenses. So three months of what we spend on our basic mortgage payment (not including the extra we pay toward it), excluding things we could cancel like the cell phone, etc. Excellent breakdown!

    1. Des

      That’s awesome Maggie – way to get into the details of it all! I have to admit, I didn’t do much to back up my “I’ll spend 80% of what I do now if I’m cutting back due to a job loss” assumption… but that’s Future Des’ problem. I’m sure I could find the savings though! If nothing else, telling people you’re out of work is a great way to get them to do frugal fun things instead of pricey dinners, etc.

  10. Claudia @ Two Cup House

    We’re working toward an emergency fund, especially now with open enrollment on the horizon; for the first time, we’re considering an HSA as part of our strategy. We haven’t been keeping our fund fully funded because we’re paying off debt–it’s interesting trying to maintain a balance between the two. Your breakdown is awesome because you don’t take the cookie-cutter approach and simply say “save 3 to 6 months of expenses.” Great post!

    1. Des

      Thanks Claudia! I’m definitely not into the “This is the amount, it’s the same for everyone, don’t take any other factors into consideration” approach, haha. I’ve read a lot of really interesting posts that have talked about balancing debt repayment with emergency funds too – one had a great point that if something bad were to happen, she could slow down debt repayment that month to address it, effectively using her overpayments on her debt as an emergency fund. It’s all about finding a balance that works for you!

      Also, just from following along with so many US bloggers, I’m learning so much about the different accounts you guys have available to you! I can’t even imagine – we have enough people who can’t figure out our two relatively simple tax-advantaged accounts here in Canada!

  11. ARBM

    This is great! You show so clearly how you figured out how much you need. I’ve started an emergency fund, but I haven’t got too far yet… and I didn’t really put much thought in to how much I should actually have… I’ll have to work through your steps myself and get a better idea of how much I should save.

  12. Shannon @ Financially Blonde

    I strive to get my clients to save 6 months of expenses in an emergency savings account because you really have no idea what emergency will transpire, but emergencies happen ALL the time. The larger your emergency fund, the less stress you will have in life when those emergencies happen. In just the past six months, I had one client experience a detached retina and couldn’t work for 3 months, another client’s fridge and oven broke down and it cost almost $2,000 to replace, another client had car trouble that cost $1,500 to repair. I know these things happened because they all texted me and thanked me for forcing them to have a healthy emergency fund. The healthier the fund, the less headaches you have in your future.

  13. StorJ

    I have more then 12 months in my emergency fund… in fact my fund has about 3 years of expenses which is where my comfort zone is at

  14. Retired elder dude

    Hi, Desirae,
    A great column – wish it (and p.c.’s) had been around when I was your age. Good advise on beginning an emerg. fund immediately; life always throws us a few unexpected curves, and Boy Scout pre-paredness provides financial/emotional relief. Know how tough it is to save when young, but if disciplined to put aside even $50/mo it will add up. Strongly rec. to put $ in a TFSA for emerg., and EQ Bank’s (non-solicited plug here) 2% daily rate is tops. Better than any Cdn GIC under 2 years that I am aware of; and tax-free/compounded monthly/available without penalty if emerg. should arise.

    1. Desirae

      Thank you so much – and I couldn’t agree more on your recommendations for where to put the money! My emergency fund is with EQ Bank right now and the 2% interest is downright magical, especially as someone who’s only really lived through lower interest rate environments. “You mean you’re going to pay me HOW MUCH every month just to keep my money here?!” And ok sure, it’s only a few dollars, but compared to a few cents that’s great!

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