Despite my recent musings about the efficacy of emergency funds, I honestly do want one. A robust one. One that can make it through the Oregon Trail without dying of dysentery.
The question, though, is when is your emergency fund… done?
The conventional (pre-recession) wisdom was 3 months’ expenses. Now you hear anything from 6-12 months. There are other people have an actual dollar amount. One reader had her EF hit $10,000. Another mentioned that $2,500 is her magic number.
I asked some other PF bloggers. Most of them have 12 months’ expenses saved up, but that isn’t necessarily their recommendation for others. The general consensus is, well, that it’s personal. Your optimal EF will depend on factors like job stability, risk tolerance, investment levels, and more.
Here are some specific points from them:
Mike from Oblivious Investor was fine with 6 months when he was an accountant. Now that he’s self-employed he wants 12 months’ expenses.
Ashley from Money Talks Coaching agreed that her 6-month account would need to double if she were self-employed.
J. Money started with 3 months’ expenses, but has moved to a full year’s expenses.
Katie from Girl with the Red Balloon wants 6 months’ of expenses. (Interestingly, six months of only her expenses.)
Lisa from Every Woman’s Money emphasized individual situations are what matters: debt size, financial commitments, your spouse’s job and/ormoney-making skills, family support, etc.
Andrea from Take a Smart Step keeps 12 months’ worth around. ” I prefer that my emergency fund has an emergency fund.”
Doug from Military Retirement & Financial Independence says servicemen and women don’t really worry about sudden layoffs. So they can have very small emergency funds.
Eric from NarrowBridge Finance started at 3, increased it to 6 and has now decided on a specific dollar amount.
Kelly from The Centsible Life keeps just one month’s expenses. The rest go toward debt. But, she points out, that’s only because they both work, and her husband’s job is very stable.
Emily from Live Like a Mensch says hers is $1,000. But they have various other savings accounts, which can act as an emergency fund in a pinch.
I was thinking of something similar in our situation, so this resonated with me. Granted, I want more than $1,000 — probably $3,000-5,000.
The main issue here is when you start diversifying from your emergency fund to other kinds of savings.
I do want a cushion, but I also want us to have a normal savings account for non-emergencies. I don’t want to spend a year or more building up a 12-month EF and then start saving for those double-pane windows.
What’s your ideal emergency fund? And how do you/would you balance an EF and a regular savings account?
Also, I couldn’t find a good place for this in the post, but I still wanted to cite the answer from Todd of Financial Mentor:
“The 3, 6, or 9 month rule only makes sense when your savings are below that number. Once you move beyond that number for your total savings you move from conventional personal finance rules to wealth building rules. In other words, the complication of keeping an emergency reserve separate from your growing liquid net worth ceases to make sense. It is more important to aggregate your funds and focus on investment strategy to enhance net worth.”
Food for thought.
I have 12 months worth of emergency savings identified as such. If I were to lose my job and not find work right away, or find work that didn't pay as much, I also have the option of renting out a room to a housemate, which would pay my mortgage, and I would have to come up with property taxes and the monthly HOA.
Spiffikins: Sounds smart! In a pinch, I guess we could do the same. Between that and what his parents give us, our mortgage would be covered. Then we'd just have to be able to cover utilities. In the summer, though, that's nothing to sniff at!
I have a 6 month emergency fund. I can understand why a self-employed person would want to a 12 month fund since income can be unstable and it may be necessary to take from the EF during lean times.
When I was building my EF I focused on saving only for it. Only after I had it in place did I start putting aside money for vacation or other big purchases. I find it easier to focus on one big goal at a time.
I think that's definitely a good method. I get so overly focused on one goal, that it becomes a "forest for the trees" instance. So I want to avoid focusing on just one goal. But one of the goals needs to be the main priority. For awhile that will be padding either an EF or savings.
And I don't want to start diversifying until we're on slightly better EF footing.
My husband and I have an efund equal to about 10 months expenses. We could pay our bills (but not save anything!) on one income instead of two. So our 10 month efund might be overkill, but I’m in the I-really-need-a-huge-efund-to-feel-secure camp. I agree that the ideal efund depends on many factors, including preference, job security, and whether the household has multiple incomes and excess cash flow every month.
I think I understand where you are coming from in terms of wanting to also save for other goals, like travel. We also save for goals like car replacement and travel — and these goals seem more fun than the efund. We have a big savings pot that we can divvy up as we like.
Jenn: Sounds like you know what makes you secure, so that's always important.
Since Tim isn't currently working, we sort of already exist on one income. His $800 a month (minus Medicare payments) certainly helps, but there's no way we could make ends meet on just that.
Luckily, my job is very nearly the definition of stable. That said, the idea of having a 10-month cushion does seem awfully appealing. I never can make up my mind. I think for us the best mix is to save up for some fun things (plus our next car) and keep slowly adding to the EF until we hit somewhere I feel comfortable. Goodness only knows when that will be.
We just went from 1 months spending to 2 in cash. We have a secondary emergency fund that is over a year of spending in taxable stocks. I can't get fired from my job. Our monthly income is enough to replenish the emergency fund relatively quickly while DH is still working.
Sounds perfect! I like the idea of a smaller EF for smaller, more immediate needs and a year's worth in a second account.
Currently we have one month's expenses saved in an emergency fund. After we pay off debt, the goal is to get it to $10,000 give or take. I like the idea of a "baby emergency fund" until debt is paid off, but it's amazing how once we had a number that we were comfortable with in the bank, we were spending less over all and money was a less stressful topic.
Andi: Yep, sometimes a number is really what you need. With a goal in sight, it can be a lot more motivating — and a lot more rewarding as you near the goal.