You know you should have an emergency fund, but how much should you keep in there?
The answer I’m sure you’ve heard often is three to six months’ salary. The idea is that whatever your take home pay totals, you need to make sure you keep at least three months of that in an easily accessible account.
In reality, this isn’t a one size fits all question.
It is flexible depending on how much of your pay you’re currently putting in investment accounts, how many streams of income you have, and how much cash you have in other accounts.
Yes, you can have too much in an emergency fund.
However, there’s never too much you can have in investment or retirement accounts. Is there such thing as too much money? Nah.
You want to make sure your money is working for you while you sleep and compounding.
The Minimum Emergency Fund
I have always liked the idea of having six months as a cushion for the unexpected. You should have six months worth of cash saved up to get you by.
The key is: Get You By.
Are you paying extra on student loans or housing in order to pay those items off faster? Good for you!
If you were in a situation where you lost your job, you would stop putting extra funds towards anything. Until you’re back on your feet with regular income coming in, you would pause all extra spending. Extra spending would include money going to pay down debt faster.
Your emergency savings needs to hold what the minimum is that you have going out the door. What’s the minimum on your student loan or house payment? What’s the minimum on food and miscellaneous expenses?
Calculate Your Personal Amount
Take the calculator below and figure up what the minimum is that you pay out each month. If you have children, don’t forget their sporting events or other activities that they have going on each month.
Coming from the mom’s perspective, I don’t mind living tight for a bit while I get through a tough period, but if I can keep my children living the same life, I will do so.
Obviously we won’t be going on shopping sprees, but the activities that they love and keep them active would not change if I can help it.
You may notice a few things purposely missing from this emergency budget.
Subscriptions, gym membership, savings, gifts, travel… I have left them off because you are not going to be needing these things while you are in-between jobs or in an emergency situation. Let’s stick to the basics when it comes to what you have to spend on.
Emergency savings isn’t only meant for job loss. If you own a home, it’s meant for needing a new air conditioning unit or having a roof that leaks.
All luxury items go on pause until your emergency fund is up to par.
This money is held in an easily accessible account. Any funds you have above and beyond these emergency savings are held in investment accounts that you can still access, but perhaps take a few days to get your hands on.
Side Note: Living Paycheck To Paycheck?
Like I said early on in this article, this is not a one size fits all scenario.
If all you can save is $10 per week, that’s all you can save. I am going to say that if you find yourself in this situation, there’s something not quite right with either your expenses or the money you have coming in every month.
If you love your job, find something on the side to help support your current lifestyle. Check out our article on side hustles.
Make sure you’re not living above the lifestyle that matches your income. If you earn $80,000 a year and have a mortgage of $3,000+ per month, that is an issue. If you are not able to contribute at least 10% minimum to your retirement account, some life changes need to be made.
Next Step After Outgoing Expenses Calculation
After you have your minimum monthly spend, multiply that number times six. That will be your six month minimum emergency savings amount. This number should be enough to cover emergency situations outside of job loss or a temporary disability, such as home or auto repair.
If you are a home owner, when you are able, I do suggest having a separate account set for home repairs or upgrades. I can’t count the number of times I needed thousands of dollars on hand to replace something. I knew this item would eventually need to be replaced. If a new roof is in your future (and it is eventually for everyone), begin saving for that separately.
If you are not a home owner (or even if you are) you should also be separately saving for things you will need in the future, such as a new car.
The idea of an emergency savings is just that – it is for emergencies. Buying a new car or replacing an A/C unit that you’ve known was on it’s last leg is not considered an emergency.
Final Thoughts on an Emergency Fund
Having more than one income stream will decrease the likelihood that you need a large emergency fund. I’m a huge fan of having more than one paycheck flowing into your bank account every month. I have an article dedicated to side hustles here if you want to start exploring options outside of your regular employment.
Getting out of debt quickly will allow more flexibility during an emergency situation. The smaller amount of monthly expenses you have, the smaller your emergency fund will need to be.
#Goals – Try living off of one income in a two income household. If you earn $110,000 per year and your partner earns $50,000, you live off of only $110,000. This is easier after a long term job loss, disability, or even after living off of one income due to a parent staying at home with children. Base your expenses off of $110,000 and use the $50,000 for investment.
If you need specific advice for your situation, please feel free to contact me!
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