Happy August everyone! Today, I have an awesome post written by my usual Thursday staff writer, Jordann. I also have a new post on my other blog about Disadvantages/Negatives of Working From Home.
An emergency fund is money that is set aside in case of emergency. It's there for you when you need it for an unexpected expense, to prevent you from dipping into a credit card or a line of credit and ending up in debt.
Emergency funds come in all shapes and sizes. Some people, like myself, have a baby personal savings plan, because they are spending most of their money paying off their debt or saving for something. Others have a much larger emergency fund.
Common wisdom (aka: Google) says that you should have three to six months of expenses saved in your emergency fund. What I'm wondering is, does that amount work for everyone?
Steady Job, Baby Emergency Fund
As I mentioned above, I have a baby emergency fund. I'm doing this while I'm paying off my debt, because I hate the idea of large amounts of cash languishing in a savings account while I'm accruing interest on my loans.
I'm comfortable with this amount because my job is fairly stable, and I don't anticipate being laid off in the near future. In my case, my emergency fund is meant to cover emergency expenses, not job loss.
Of course, ideally, I'd love to have three to six months of living expenses in my account, but that goal will have to wait until after I pay my debt off. I say that my job is stable, but no job is ever truly stable. Due to this, having several months of living expenses squirrelled away would be good insurance incase the worst happens.
Self Employment, Large Emergency Fund
My husband, on the other hand, is an entirely different story. He is self employed, so his income is fairly erratic. Some weeks he makes several thousand, other weeks he makes several hundred.
Due to this, he has his own personal emergency fund that covers several months of his expenses. He is fortunate that he rarely has to tap his emergency fund, but in the off chance that work dried up for a few months, he wouldn't have to worry about making ends meet.
His ideal emergency fund would contain a year of expenses, so that he could truly feel comfortable with his self employment.
A Balanced Emergency Fund
While my husband and I have mostly combined finances at this point, our need for different emergency funds has kept that aspect of our money management separate. Once my remaining $4,500 in debt is paid off, I plan on combining our emergency funds and working towards having six months or more of our household living expenses covered by the fund.
This way we'll be ready for every possible scenario: Unexpected expenses, my job loss, or his self employment income decreasing.
Having an emergency fund can be a great way to insulate yourself from life's curve balls. They aren't one size fits all, and having a more or less stable job should play a role in deciding how large your emergency fund should be.
How big is your emergency fund? Do you have a baby emergency fund like me, or several months of expenses put away like my husband?
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I’m just currently building my emergency fund up and I consider it to be as a baby for now. Anyways, you really shared an incredible post right there, thanks a lot!
Gotta start somewhere! I remember when my emergency fund had only $200 in it – it seemed so small! Now it’s closer to #2k, much better!
Ideally the wifey and I wanted to have six months expenses but chose to go with 12 month. We wanted to make sure that we could go more than six months if both of us lost our jobs and 1 year if one of us lossed our jobl. Now though we me starting my own business I have been working on a extra cushion for myself to save up 18 months expenses to cover whatever my income takes care of. With businesses you never know what is going to happen from one day to the next. Everyones situation is different but I would at least have 2-3 months in a savings account or have a way to get the cash if needed just in case you lost your job.
18 months of expenses would be awesome! But don’t you ever feel like that money could be better spent elsewhere? That’s what happens to me.
Ours is on the larger side because I’m self-employed and we have rental properties that might need repairs at any time. I would rather be safe than sorry.
That makes sense!
Our emergency fund is on the larger side because I am self-employed and we have rental properties that could need repairs at any time. I would rather be safe than sorry!
We have a joint emergency fund that will cover about 4-6 months of expenses in the case of dual job loss. However, with my husband being in the military, job loss isn’t really something we’re worried about at the moment. My job, at a bank, is also pretty secure. We still keep quite a bit in savings though because we don’t really have any debt we are wanting to pay off right away. We have a house and a car that are both financed at very low interest rates. But then I also have a “minor” emergency fund which is for things like car parts or another unexpected need. Great article! 🙂
It sounds like your lifestyle is fairly low risk like mine, a baby emergency fund should suit you well!
TEST
Good points Jordann! Our EF was quite a bit smaller before we started our own business. Now that we have that extra risk, we like to have a larger one. We’re working towards having one year of mortgage payments and 6-9 months for expenses.
That sounds like a very healthy EF to me!
We have around 10K€ in emergency fund, which would cover around 4-5 months of expense (by limiting to the strictly necessary). For now we don’t plan to get more than that as we are saving as much as possible for wedding 😉
As for the risks, we have both stable job (in IT), very unlikely to be laid off… Health issues would be nicely covered by our socialized healthcare 🙂
Sounds like you are definitely prepared!
my emergency fund is about 3 months right now. i’d love to have a little bit more just in case, but since i have bills and student loan debt, it’s tough. i feel similar to you that i hate to havea stockpile of cash when i’m accruing interest on debts. we recently had to dip into my emergency fund for some house issues, so i’m definitely glad it was there!
— jackie @ jade and oak
Right now, my job’s pretty stable so I keep a mini baby EF ($1k). I would totally love to get it up to 3 months’ worth of expense, but that’s not amongst my priorities right now.
I definitely think that your job should have an impact on your e-fund, but it’s important to remember that getting laid off is not your only risk. You could be disabled. You could incur a big hospital bill. The list of potentials is long, but the point is that it’s not just about job security. I’m trying to disagree with your personal approach, just want to lay out that there are other considerations.
I’m slowly building mine up, but it’s definitely not as high as I would like it to be! A year of expenses would definitely make it easier to go to full-time self-employment without having to be stressed about the ups and downs that come with it.
I would tend to not base my emergency fun on my earnings but my expenses. Our household is lucky enough to have less expenses than earnings, so we are using the extra money to pay off our mortgage early. We tend to keep enough money in the emergency fund to cover three months expenses rather than three months salary. I have been advised to keep a years salary though, just in case of redundancy, but I feel this is rather high. Do others agree?
Mine is on the larger side since I have been debt free for a couple years now and have been able to put a lot into it. It’s been a priority of mine to build it up so I don’t feel like I need my job but rather I want it.
Oh wow good for you, Connie. Guess I’d put more into it when I’m debt-free.
Since I am a single mother I think I need a large emergency fund. If something were to happen to my income I have no back up. Ideally I would like to have six months worth of expenses saved but that’s kind of on hold right now.
The Mr. and I just had this conversation last night. Up until April, we both had steady full-time employment. In April, he accepted a per diem job and his hours are erratic. At first, the pay was steady, but summers are hard in his field, so we’ve taken a hit. Coming to this conclusion the hard way has been difficult, but now that summer is almost over, we have 9 months to prepare a larger emergency fund for next year.
I wouldn’t say that we have a baby emergency fun per say, but we are working on getting used to living just off my husbands income as much as possible and using my paychecks to pay larger payments and save more. We are slowly getting there, we are at about 65% of my income right now not going to day to day. Hope to be close to close to 100% by the end of the year.
Interesting article – I agree that these things are all person specific.
I don’t have a huge emergency fund – I could cover a couple of months spartan expenses if the flow stopped tomorrow without tapping into retirement type savings, and I have no debt aside from my mortgage [I’m also, I’m certain, quite a bit older than the author LOL]
But another reason I don’t have that sort of EF set up is that a) my job, and my husband’s, are fairly steady [our incomes are completely combined].
And yet another reason is that fortunately for us our parents are all alive, well and comfortable. Mine are sufficiently so that should I reach a tight place I know I could tap their finances if necessary [no, I don’t have any siblings to get annoyed by this – or I would NOT consider it] and it doesn’t seem to make sense to set aside additional moneys during this money intensive time now with kids at home only to preserve what I’m sure will be a windfall some time [hopefully VERY] far down the road when I inherit [when I won’t need it in my estimation]
And yet nonetheless, I would love to have a year’s expenses sitting fluid in the bank – because it would make me feel all warm and fuzzy and secure – no matter how practical I am, it’s hard to be unemotional about money!
At first I thought you were talking about an emergency fund for a baby.
We have one of those, in case of a baby.
We also have 8 months of absolute bare bones expenses saved (that means no cable, no internet, just rent , food, and gas). Both our jobs are middle-of-the-road where stability is concerned.
But since we want to pay off our student loans, I’m debating reducing one or both of those emergency funds. Still we are both scaredy-cats so that will not be easy to discuss or do. So basically we use our feelings to dictate our emergency fund, I guess.
Our ER fund is quite small at the moment since we’re paying off some debt. However, it would be nice to have three to six months of expenses saved up, especially since Mr. LH’s income is erratic (self-employed) and my income stream is fairly new. I’d hate to be in a position of losing one income. Thankfully, we’ve always had ways to earn money, but it’s no replacement for a nice chunk of dough.
I’ve always found the conventional wisdom on emergency funds to be excessive. so I try to maintain around three months of living expenses in cash.
If I have a REAL emergency I’ll have no trouble selling investments to make it through.
I can always make more money…I hope?
My wife and I have 6 months worth of expenses saved up. It helps us feel safe and know that we’ll be fine for quite a while even if we both lost our jobs. I’m intrigued by you and your husband having separate emergency funds. I just know if my wife lost her job, it would be my responsibility to support her. I wouldn’t expect her to have her own fund and survive off of that without my help, but I guess it sounds like it’s working well for you two!
We have 12 month emergency fund purely for peace of mind – my husbands workplace is constantly restructuring – it helps us to sleep at night.
If/when you are aggressively paying off debt I think it’s ok to take a risk by having little to no emergency funds especially if you are getting close to final payoff. You are kind of “going for broke” anyway at that point. That’s what my wife and I did. We kept a minimum amount of cash around while we were making massive loan payments and then, towards the end, we took the gamble that we wouldn’t need anything over a several months period just so we could finally extinguish the debt. We were down to a few hundred dollars at one point! It all worked out though and allowed us to get rid of the debt a bit faster.
Ours is about 14k and it never feels like enough. I also have money on various other savings accounts. Still it never feels like enough. I think you really just have to do the best you can.
We just started building ours and so it’s very low at the moment. We want to build a one month emergency fund for now until we can pay off all debt and then build a 6 month one later.
I personally think large emergency funds are a waste. So I have a small one (about $2K same day cash and $5K 3 day cash). Other than that I invest everything else. You could call that an emergency fund since it is in a taxable account. Personally I don’t see too many times I need more the $2K at once in cash that I can’t just use one of my credit cards, then I have a month to pay them off (because I know I have ways to get cash that take a few days).
I don’t have an emergency fund per se, just a general TFSA where I throw all my “extra” money. I’d love to be more organized and allocate my savings better, but right now I’m just grateful to have any savings at all!
I’ve been meaning to write a post on this exact topic! I think it is good to look at it in terms of time, but also in terms of levels of cash. So, for example, maybe it’s one year of “survival” cash, that’s your mortgage, food, utilities, etc., but maybe only six months of “normal” expenses. So if things go really badly, you can cut back and go a year, but if it’s relatively small blip of disruption in your life, you have six months of cash to ease the stress.
I have a bigger emergency fund right now, but some of that is for a down payment on a house. I also have started putting some money away in my Roth IRA in case of an emergency because you can take the contributions out without a fee or tax hit. I would rather have some of my money grow with the market instead of not even meeting inflation.
I would like to have a six month emergency fund personally. I don’t think it really matters what type of job you have, an emergency is caused when you lose your income either way. I think I could get another form of employment going within six months, so that is the number for me.
It’s funny to read this because I just commented on another site about it. Being self employed I have no choice but to hold more emergency cash back to deal with the unexpected problems life throws your way, especially when they hit your income and expenditure at the same time, like unexpected travel and things of that nature.
We would love to have an emergency fund for 6-12 months of expenses, but right now we just don’t. We’re living off my husbands income which covers most of the bills + my self employed income which, like your husbands, fluctuates a lot. We put a little into savings each month directly out of the check, but the last few months have been a bit slow for me so we keep having to use it. I think that no matter what kind of job you have, you should have a decent emergency fund, unless you have somewhere else to go (besides credit) for fast cash in an emergency.
Our jobs definitely dictates our emergency fund along with other personal situations. When I was employed at a company, we had 6 months worth. Now that I have moved to self-employment and have a house (and soon, a baby) we are hoping to increase it to 1 year. We also have aging parents living several continents away, so we will have to book a flight ticket within a few hours notice if we need to get there quickly. So we account for that in our emergency fund too.
My emergency fund is currently at $1,000 and I’m totally okay with that. Like you, I can’t stand having tons of cash sitting in an account gaining less than 1% interest when my debt is growing a bigger rate! Perhaps once my CC debt is gone, I’ll add to it.
We currently have a baby emergency fund, definitely enough to cover small unexpected costs, but we are working on growing it at this time so that we can have 6 months worth saved up. Just in case one of us loses our jobs or has an accident. Life is full of surprises and you really just never know.
Mine is on its way to $10K … I’m 90% of the way there. $10K will cover 6 months of mortgage payments plus all bills related to my house and car, plus money for gas and groceries (but not entertainment). My job is about as stable as they come, but I am on my own, plus my car is 6 years old, so 6 months is the amount I need to feel comfortable.
Dayle
I like your tiered approach: context is everything when you’re talking about the right amount to save for emergencies.
We keep $10k in cash specifically for emergencies. We’ve yet to have to really use it (knock on wood). I’ve seen some compelling arguments to use debt (e.g. – MMM’s “squishy debt”) as your emergency fund, but in a true financial emergency those credit lines can dry up (as your risk profile gets worse when you lose your job, or companies become less likely to lend large sums when the economy tanks). The opportunity costs on the $10k are significant but not so large that we’d miss out on our goals because of them.
I am completely with you on this topic. I have a small emergency as well due to the amount of interest on my debt. This past year my emergency fund has come in handy a few times so as of right now a small emergency fund is best for my situation at this moment.
Emergency funds are a great idea but because we already have a significant amount of savings we don’t feel the pressure to have 6months of living expenses saved up. We’re also paying off our mortgage early and regularly have up to $8k in cash that we put against the mortgage every quarter.
We have always had $1000 emergency fund with the hopes of building up to 3-6 months worth of expenses after we pay off our debt. HOWEVER, with Baby on the way, we are now in a save-as-much-as-possible mode until the baby comes in December. After expenses level out, we’ll reevaluate what the emergency fund should be!
We’ve always had a mini EF of $1000 as recommended by Dave Ramsey. After we pay off our debt I’d love to build that up. In the meantime, with Baby on the way, we’re in a save-as-much-money-as-possible mode. After our expenses level out, we’ll reevaluate our EF!
Our emergency fund is in flux right now. I’m paid 9 months out of the year and can’t be fired (unless I break the law badly or the school is shut down etc.) So throughout the year I have to save extra money to cover the unpaid summer, so as the year progresses the amount we have in cash increases. Before DH quit his job, I’d have one month expenses in savings as our emergency fund because we were saving 40-60% of our take-home pay each month and would have money to tide us over the next month in an emergency. Now we don’t have that buffer– our annual income is about equal to our annual expenses plus mandatory saving. So technically our emergency fund is now 3 months expenses, but I also have our money needed by next May… and that includes private school tuition and daycare. So that is an awful lot of money.
I have a large emergency fund for someone who doesn’t own a home or have many liabilities, but I am a worrier so I’d rather have more than less. My boyfriend doesn’t have much of one, and since his car is less reliable I’d like to think I’d have enough to help him out in case something happened. While I would consider my job to be stable, anything can happen and I just think it’s best to be prepared.
I’m like your husband in that I’m self-employed so I’ll feel comfortable when I reach 15k. I know that’s a lot but I don’t want the stress and worry if I have a slow month.
Good for you, Jordann, for working off your debt and having an emergency fund. I’m interested in your contention that different kinds of jobs warrant different-sized emergency funds. In this day and age of “right to work,” a person can get fired with no notice. A company can also go out of business, or have to cut personnel, overnight. Since my wife and I both work for the same company, we have a year’s worth of expenses saved in a CD ladder. The penalty for breaking the CDs is only 60 days of the most recent interest. We have another year’s worth of expenses in treasury i-bonds. These keep ahead of inflation, no matter what. I-bonds cannot be redeemed during the first year, and if you redeem them within the first five years after purchase, you lose the most recent three months’ interest. When I Bonds are redeemed, the interest is taxable income for federal income tax, but is free from state and local tax. Another bonus: if the entire proceeds of the i-bond redemption are used for qualified educational expenses, the interest can be fully tax-free.