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How Big Should Your Emergency Fund Be?

Uncle Scrooge bank by Andrei! on Flickr Last month I announced some changes to my Savings Snowball, including dropping the goal for my Emergency Fund from $10,000 to $5,000. No one said anything about that, so it must not have been a huge controversy. But I don’t find myself especially comfortable with either of those numbers. Why? Because nailing down how big an emergency fund should be is not easy.

Experts love to give you rules of thumb like “3-6 months living expenses,” which is certainly as good a metric as anything. But if your current living expenses are inordinately high or low, that’ll throw the whole thing off.

The truth is, your emergency fund should be big enough to exactly cover the cost of true emergencies in your life, but no bigger. Obviously not having enough money in your emergency fund is bad, but too much money isn’t good either. You might be tempted to use your E-fund for non-emergencies if there’s too much money in there. And extra money in your E-fund isn’t being put toward other goals in your life, which will slow those goals down.

The truth is that the only way to know exactly how much money you’ll need in your emergency fund is to be psychic. And I’m going to go ahead and assume that if you’re psychic, your emergency fund consists of “already knowing the winning lottery numbers.” So for us mere mortals, we must rely on the old metrics of “3-6 months expenses” or simply picking a nice round number out of thin air, like I did.

Some tips on keeping your emergency fund big enough, but not too big:

  • Remember to adjust the amount for life changes. When you first move out on your own, you’ll need a bigger emergency fund than you did when you lived with your parents or at college. In general, the size of your emergency fund will have to grow as you go through life.
  • Credit cards and other available credit can help in a pinch, but don’t rely completely on them. We all know that people who consider credit cards solely as their “emergency fund” are stupid. But if you have a credit card with a good limit and a low interest rate, it can be used once your cash reserves are tapped out, as long as you have a way to repay it later.
  • Personal relationships should also be a part of your emergency fund. Don’t be a mooch and go running to friends and family for every little thing that comes up! But do work toward strong ties with people so that you have people to rely on in a true emergency. The flip side of this is that you have to be ready and willing to help out with their emergencies, as well.
  • Avoid tapping your emergency fund as much as you can. If you can pay for minor emergencies or not-really-emergencies out of pocket, then you won’t need to keep as much in your actual emergency fund to cover the real-deals.
  • Keep your deductibles for insurance in mind. If nothing else, your emergency fund should have as much in it as your highest deductible – be it auto, home, or health insurance. Best case scenario would be enough money to cover all of your highest deductibles.

Don’t sweat your emergency fund too much. Yes, you should have one and you should follow the tips above to choose the size of it. But slow and steady wins the race – putting aside any money every month into an emergency fund is better than not. In fact, half of Americans have no emergency fund at all, so if you put anything away at all, you’re already “above average.” Just don’t let that go to your head, hotshot!

33 responses to “How Big Should Your Emergency Fund Be?”

  1. LeanLifeCoach

    I would also suggest that an e-fund can be reduced as the value of your investments increase. i.e. if your annual expenses = $50K and you have $200K in a taxable trading account, how much cash really needs to be liquid and easily available? Do you really need 6 months cash? If you can sell off your stock/bonds within a few days I am thinking you only need a $2K-$5K depending on your comfort level.

  2. Mike

    I agree with the above poster – as your other investments grow you need less of an emergency fund.

    Think of it as a cushion to tide you over until you can access other investments if disaster did strike. With my other investments I could withdraw funds within a month, so I work on needing a months funds readily available.

    Downside is that if I do need to draw on my savings in an emergency (a true emergency that is) I may not get the best possible investment return. But, in a true emergency situation, I’d have other things to worry about.

    Also, just because it is supposed to be a readily available emergency fund doesn’t mean that you shouldn’t be trying to get good rates of return.

    You could structure it to mix accessibility with returns:
    £1000 in an instant access savings account
    £3000 in a savings account with higher interest, but also a notice period
    £5000 in a stocks and shares ISA

    If disaster does strike you can access funds, but also don’t have the whole amount earning a pittance in an instant access savings account.

    Other ways to save your emergency fund: Over pay your mortgage – if reduces your monthly interest bill and, depending on your provider, you will be able to make withdrawals against the amount you have overpaid and/or take repayment holidays.

    1. Koyie

      That’s a nicely made answer to a calhlnegnig question

  3. –› Should You Use Savings to Payoff Debt?

    [...] As we discussed emergency savings, she asked about the six month rule of thumb for emergency savings. A rule of thumb is often thrown out when people ask how big should your emergency fund be? [...]

  4. ctreit

    flexo at http://www.consumerismcommentary.com/ has written a similar post recently, in which he suggests that you should devise an emergency plan rather than set money aside for emergencies only. This plan includes things like accessing credit cards and relying on your personal relationships to some extent just like you suggest. I like the approach that you and flexo are taking.

  5. Debtman

    I agree with the 2 posters. Although I’m not sure I agree with Mike where to put the $$$. I think e-funds should be kept in an ultra low risk place, therefore, investing in stocks would not be ideal. I would recommend that the e-fund be placed in a high interest account. Banks such as ING and a number of others have high interest money management accounts that actually have 2.5-4% interest. So, while the e-fund sits at least it’s gaining something and not sitting in a crappy .005% checking acocunt. Also, there’s 0 risk of dropping below the book value.

  6. Ken

    I say one months expenses is a good minimum. I don’t like using CCards for EF. I recommend online savings account like ING.

  7. Mrs. Money

    I never know how much is enough either! I feel like we’ve got a pretty good emergency fund, but I feel like I always need more!

  8. Ted

    While paying down our debts, we are keeping $1,000 in an emergency fund. But, we are also setting money aside for taxes, car repairs, insurance, and a few other needs that pop up year round. Worst comes to worst, we can access those funds and save a little extra the next months to take care of the emergency. Once we are out of debt, I want to get up to 10,000 in an easy to access emergency fund and around $5,000 in cash in case of opportunities for investing, giving, or sale items we need.

  9. DB

    I think people confuse two issues: life’s emergencies, and loss of income. Many people say you need to have 3-6 months worth of income (some say a full year’s worth) saved up in your emergency fund in case you lose your job.

    I approach it differently. I have two seperate funds – an emergency fund, and an income security fund.

    I try to keep my EF around $1000 – this is for unexpected emergencies that need to be dealt with.

    Meanwhile, I am trying to build my IS fund to cover 6 months of expenses in the event I cannot work. I have very secure employment, but one never knows.

    In addition to these two accounts, I have several other sub-savings accounts into which money gets deposited each paycheck (family fun, future auto, auto maintenance, family health, home improvement…). I have pre-determined how much goes into each account, and I don’t even have to think about it – it just occurs automatically.

    This system may not suit everybody, but it helps me keep focused on saving as well as compartmentalize my savings. I am to the point where there is virtually no way I would use my Family Fun account for ANYTHING but family fun! And so on…

  10. Frugal Babe

    We’ve had about $5000 in our emergency fund for a couple years now, but we finally decided to bump it up a bit. We’ve put it on auto pilot, with a $500 contribution scheduled to come out of our bank account and into a Vanguard municipal bond fund each month. We spend about $3000/month (our mortgage is $1500, the rest is for food, insurance, utilities, and other small stuff), so we need $9000 – $18,000 in order to be at the magic 3 – 6 months of expenses. We’ll keep up the monthly contributions for at least a year, and then see how we feel… we might go longer. We’re working really hard at paying off the mortgage right now, and should have it gone in another 5 – 6 years. At that point, we could reduce our emergency fund quite a bit, as our living expenses would drop by half.

  11. Austin

    I keep mine low right now – $1,000 – since I work for the Japanese government in a very stable job. I’m lucky, but I’ll take advantage of my situation and continue to add to it.

    I like the part about not being a mooch. I think a lot of people consider their parents to be their emergency fund, but I have some pride complex that makes me avoid asking my parents for money help.

    Austin @ Foreigner’s Finances

  12. Weakonomics Links: Anatomy of a Sucker | Weakonomi¢s

    [...] Poorer Than You does something all of us personal finance bloggers try to do and define how much you should keep in emergency cash. It’s a difficult topic to define and for the most part, we all get it right because if you’re saving something, you’re doing it right. By the way, my method is simpler than most. Take the current unemployment rate and turn it into months. So if unemployment is at 10%, you need 10 months of living expenses in savings. It’s a rule of thumb mind you, but it’s a good place to start. Share: [...]

  13. P M Hager

    hey thanks for the advices you have mentioned above im looking for the similar knowledge..keep it up

  14. nklsmom

    I wish I knew how to link!! I mentioned your blog on mine today – just thought I’d share :)
    Love your site
    xoxo-nklsmom

  15. lonewolf

    I like the part about not being a mooch too. I too have some pride problem if asking anyone for money help

  16. Financial Samurai

    Tough question. I’ve never differentiated between my emergency fund, and my savings. It’s all one and the same. Am I wrong to not differentiate? Happy to hear your thoughts.

  17. DB

    Financial Samurai – whatever works for you is what’s best for you – there aren’t any “rules” to follow. For me, it really helps to differentiate my savings. When it came time to buy a new computer, I had no problem taking the money out of my “next computer” fund, which I had built up slowly over the past couple years (~$10 every two weeks). And when Christmas came around and we decided to head to Florida to visit my sister, the “family fun” account covered every expense of the trip.

    That’s just how I learned to do it a couple years ago, and it’s worked very well for me.

  18. N Dalby

    Excellent article – and one that makes me feel slightly smug that I’ve already started one. I was always told to work on the basis of putting six months salary aside so you could be sure that a) your mortgage or rent would be covered and b) all your usual outgoings would be covered too. I guess six months gives you the breathing space to find new employment and wait for the new salary to kick in.

    It’s important to me to be independent with money – I’ve been caught up in the overdraft situation and it isn’t something I want to repeat.

  19. Anon

    Now days I think your should have your emergency fund as big as you came make it. And only touch it for the extreme situations. So many people are now filing for bankruptcy because they have also depleted their emergency funds and retirement accounts. I do not see things getting any better within the next couple years.

  20. juriel

    As early as possible saving money for emergency fund is the best thing to do. We never know what will happen to us in the future. So, if things might happen (hope not) we are ready.

  21. Huey Harden, the Get Paid For Your Opinion Guy

    Here’s how I save money.

    Everytime I get paid, and I mean EVERYTIME I get money, whether it’s $1 or $1000 dollars, I split the proceeds like so:

    55% Necessities – pay for necessities
    10% Financial Freedom fund – don’t touch!
    10% Long Term Investment – use to invest in assets
    10% Fun – Splurge on this!
    10% Education – set aside to pay for your ongoing education
    5% Give – give this to charity

    You should have insurance as part of your strategy, especially the most affordable term insurance.

    And best of all, I stop thinking that I have a fund for EMERGENCIES. It just attracts emergencies to you. :)

    Huey

  22. Matt

    I never really thought about the size of an emergency fund that much. I just started mine and was going to keep adding money to it. Know staring wondering what my emergency fund balance should be. Thanks for the advice now I have some thinking and psychic reading to do! :)

    Matt

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  25. debtgirl

    Many times, debtors fall trap to emotional stress and they just want to get things over with by liquidating their assets not knowing that there’s chapter 13. As long I’m still young I definitely spare some of my penny to my emergency fund.

  26. John

    I always keep a big emergency fund, you never know whats lerking just around the corner these days. John

  27. David Wilson

    Thanks for the post, great information. People forget that changing a few small things can make a huge difference in their over all financial status.

  28. Steve

    Three to six months is the usual rule of thumb. That’s a totally arbitrary figure, and it’s rather daft because the size of your emergency fund should depend on your spending costs, not your income.

  29. shannon

    Great tips for us to put into practice, even the comments have some very useful stuff, thank you to all.

  30. Craig@protected trust deed

    Hi steve,

    I have to disagree because i am a great believer in saving 10% of your wage each week/month. I think most people will be spending more than they earn at the moment but if they can save 10% then they can have some money if times get harder

  31. الرياض

    good information

    thanks for u

  32. deanna

    great blog! i love all the tips and advice .thanks alot.