How Much of an Emergency Fund Do I Need?

by Dollar Stretcher Reader Contributors

How Much Emergency Fund Do I Need photo

You’ve heard how important an emergency fund is to financial health, but how much emergency fund do you need? This advice can help you determine your needs so you can protect your financial future.

Dear Dollar Stretcher,
My next goal is to build a fully funded emergency fund. I struggle with how much I will need in that emergency fund. Sometimes I think I need to take my current monthly bills, and using that figure, save up six month’s worth. Other times I feel that if I was in the midst of an emergency (lost job), I would cut out all frills, such as cable, eating out, etc.

I would love to see some information from other readers on how they plan for per month expenses and how many months they feel comfortable with covering.

How Much Emergency Fund Do I Need?

We get this question a lot and have published a number of articles that help answer this question. But this time we asked our readers their thoughts on this question and what they have done or are doing with their emergency fund balance during different stages of life. Many of them had some very intuitive advice to share on how to determine how much of an emergency fund you need to protect yourself in case of hard times. See if any of their advice can help you answer this very important question.

Add Additional to Emergency Fund for Every Year Over Age 45

I would start with an accounting of how much you spend and on what each month. After developing the list, line out the items you are willing to do without while unemployed. Total the monthly expenses of the remaining items. While there are various suggestions on how many months of expenses, I think you should be prepared for at least nine months of expenses.

To the nine-month total, add a month of expenses for every year you are over 45, as people in this age bracket have an increasingly hard time finding a new job. This is your target emergency fund level. Certainly judicious use of unemployment benefits will allow you to go longer should you need it, but those benefits will expire one day. If you find work before exhausting your emergency funds, you will have the balance to start replacing money used.

While this is a conservative method, unemployment with no money to support yourself is just ugly. We all read about people whose unemployment benefits are about to or have run out. You do not want to join that legion!

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Cover the Bare Essentials

For the emergency fund, we have money for six months of “bare essentials.” This would be if we lost the main income source. This would cover house payment, utilities, insurance, and essential living expenses. Keep in mind that essential living expenses do not include things like cable TV, Internet, dining out, etc.
Marcy in Colorado

Include All Regular Monthly Bills in Emergency Fund

If you don’t know when you’ll lose your job or work, then you don’t know when to turn off the cable, Internet, cell phones, etc. I think an emergency fund should cover all your regular monthly bills.

My emergency fund has two mortgage payments, enough cash to pay a month’s worth of bills and five hundred for groceries. Even though I have a freezer, I never know when a power outage will ruin my stockpile and the ability to buy food is important.

Build an Emergency Fund

With these simple tips and tools, you can build an emergency fund, even while living paycheck to paycheck.

Other Factors To Consider

Many people don’t cut their expenses in the event of unexpected unemployment until they start to feel desperate. If you have already decided you would cut certain things right away, there is no need to include those things in your calculations except maybe for the first month or however long it would take to get out of your contracts.

Another question is how long it would take you to find a new job. The higher-paying jobs are harder to find. Jobs in dying industries are very hard to find. If you are just starting out and can live on minimum wage if necessary and have no dependents, you might be fine with just three months of expenses. But if you have a house and kids and an upper-management job, you might want to save 15 months of expenses.

Another factor is what you want to do with your money once your emergency fund is fully funded. You can always save enough for six lean months, then start on your next goal while trickling a bit more into your emergency fund until you have enough for six regular months. What I really want to do next is retire early. Since investments to my Roth IRA can be withdrawn at any time without penalty (though the interest and capital appreciation can’t), I could tap into that for emergencies, especially if I am contributing more to it than I otherwise might. Similarly, if your next goal is something that could make you a lot happier, starting with the pared down fund may make sense. If your next goal is just to pay off your mortgage, you may as well make your fund pretty solid first. You get to live in your house whether it’s paid off or not, and though you can get loans based on your equity, those come with high fees and are hard to get when you’re unemployed.

I don’t actually calculate my fund in these ways though. I have separate funds for separate kinds of emergencies, such as health, car repairs, home repairs, my next car, and long term fun (usually travel and electronics). And what I calculate is a monthly contribution rate rather than an ideal goal. Some of these funds can get quite large if nothing goes wrong for a while (or if I don’t see any new opportunities for long-term fun for a while), but we all know that several expensive things can happen at once. Sometimes a fund goes negative, but I just borrow across funds (they are all in the same savings account). I don’t actually save at all for unemployment (besides saved vacation time, long-term disability insurance, and retirement savings) because I have a stable government job. That might be a mistake, though, as there have been layoffs this year.
Debbie M.

The Time to Cut Is before Job Loss

You’ll need enough funds in your emergency fund to last for 8-12 months to cover all “necessities, bills and unexpected emergencies.” You are so right about cutting expenses to the bare bones should there be a job loss. But, one can build up the emergency fund faster by making some cuts before a job loss, health problems, etc. Having an 8-12 month emergency fund brings such peace of mind. First of all, one gets to realize that they can enjoy life more on less money. Secondly, peace of mind is a phenomenal blessing!

The Little “What Ifs”

Here are some questions I have asked myself about such a fund:

  1. Do I have the money set aside to cover my home and auto insurance deductibles?
  2. What if I needed to replace my roof? An appliance? Hopefully I don’t ever have to replace them all at the same time, but it’s something to think about when funding your emergency reserves.
  3. What about unexpected car repairs?
  4. What if an out-of-town family member became gravely ill or passed away? Could I afford to buy plane tickets for my family to fly there on short notice? Would I be able to afford the gasoline/food/lodging expenses of a road trip instead? And we have pets who would need to be boarded. There would be an extra cost in that.
  5. Could I afford the co-pays/deductibles on my family’s health and dental insurance?

In addition to adding up what money you’d need to cover lost income, I’d also consider these unexpected expenses. It would be a shame for me to dig myself out of consumer debt, only have to get back in the hole again because of these unexpected tragedies.

I think six months’ reserves would be great. If we ever suffered a job loss, my family would cut out all extras (what little extras we currently have!). So I would make up an emergency budget to see what is the bare minimum my family could exist on for six months. Then add in all the little “what ifs” we hope never occur, but Murphy’s Law dictates will happen.

Reviewed October 2022

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