If you Google how much you should keep in an emergency fund, it’s going to recommend three to six months of expenses.
That’s been the standard response for years.
But, which is the right amount for you? Closer to three, six, or beyond?
Ah yes, the ol’ indirect and evasive “it depends”.
Well, it does. Everyone is walking around with a different personal situation and personal finance is personal.
While three to six months’ worth of expenses is a guideline, I think you should let your situational variables tell you the appropriate answer.
So, in this post I will explore the situations where you may want to stay lean, or go conservative.
At the end of the day, assess your situation and plan appropriately!
Emergency Funds: How Much Is Enough?
Are you a home owner or renter?
If you own, expensive things will break so you should definitely have an emergency fund for you, as well as your home. If you rent, you have the luxury of dodging costly home repairs so having less cash on hand could make sense.
Homeowners should also consider the age of their house, as well as components and appliances. Just about everything has an expected life, so if you know it’s approaching, you should be saving towards those future unexpected repairs. I recently had to tap into my emergency fund to make $5,000 worth of chimney repairs. It was an inconvenience, but having the emergency fund kept it from being a financial catastrophe.
Of course, if you can do home repairs yourself, there’s an opportunity for savings. But, you may not be able to fix everything, so it’s still a good idea to keep your emergency fund well stocked.
For those looking to eventually buy, check out 13 First-Time Home Buyer Tips to Avoid a Financial Mess.
How old is your car?
Similar to renting or owning a home, your vehicle situation can make a huge difference in how much to set aside. Not much is likely to go wrong with a car less than 3 years old, so those driving newer cars don’t have much to worry about right now.
My car, however, is 8 years old and over 100K miles. I can pretty much expect some type of costly repair at least once a year.
For you, what type of routine maintenance will your car need at its next mileage intervals? Estimate that and then cushion it for the reality that unexpected car repairs will pop up. Trust me.
How secure is your employment?
Your income is your biggest wealth building tool, which means disruptions can rock your entire world. If you are unsure whether or not you will still be with your employer over a couple years, it would be smart to save more.
If you are self-employed, you should definitely play it conservative. Self-employment can be liberating, but it can also potentially have more risk. Assess the health of your business, and consider worst-case scenarios as you may need even more than six months’ worth.
Would economic or other external factors impact your job?
If we dipped into a recession, would your income suffer?
Consider car sales, for example. In bad times, less cars are purchased. If this is your source of income, it would be smart to ensure you have more than enough to get through any bad economic swings. If you work in an industry that is not as closely tied to economic forces, you can go leaner.
In either case, even the most secure industries can see disruptions. Early in 2019, roughly 800,000 federal government employees missed two paychecks due to a government shutdown. While this is something that doesn’t happen often, it does highlight the reality that your income can be disrupted at any moment.
How much outstanding debt do you have?
Beyond having a $1K-2K to take care of urgent matters, any available cash beyond that may be better served knocking out high interest debts like credit cards.
Does that mean that non-mortgage debt should be paid off prior to building an emergency fund? Some prominent financial gurus would say yes, but decide that for yourself. It’s surely something I would do, but I won’t be the one paying for your emergencies, so take the information and apply it as you see fit.
To accelerate getting out of debt, consider using the snowball or avalanche method.
Do you have strong control over your spending?
If you were to suffer a job loss, the quicker you can cease unnecessary spending, the better. By having the discipline to put the clamp on spending, that means you can likely float on less money. If you struggle with this, it would be a good idea to aim for a bigger emergency fund as you may need to rely on it more. Those who can quickly strip down all spending down to the bare necessities may opt for a leaner approach. This involves being honest with yourself about your discipline. It’s ok to struggle with this, protect yourself while you work on improving.
How many income sources do you have?
If you are dependent on one income source, aim high in your emergency fund planning. The reason is because one disruption to your income could wipe you out quicker than those that have multiple streams.
Along those same lines, if you are in a dual-income household, you can afford to take a little bit more risk. If one of you were to lose a job, there’s still income coming into the house. This is also a great reason not to overbuy or overspend when establishing household expenses.
What is the status of your health?
Co-pays and regular trips to the doctor can add up. Be sure to get a regular physical to help you assess that status of your health. If you are able to obtain health insurance, that can carry much of the financial weight. But, even with insurance, having to be in and out of the doctor’s office can create a need to have more saved than those who rarely need to go.
People can find themselves in the hospital for a variety of reasons, so it’s best to ensure you are financially prepared for this so one trip to the ER doesn’t destroy your finances.
This would be a good place to consider insurance deductibles. Check your insurance so you are aware of deductible limits and ensure your emergency fund includes this.
Do you have a family?
Life looks a lot different when it’s just you to take care of. You can take more risks, and only have one mouth to feed. When you have a family on the other hand, there’s other people depending on you, and your income. At that point, six months may even become your minimum.
What feels right for you?
Ultimately, you have to decide what you feel comfortable with. Consider your life variables, and total financial picture to arrive at the appropriate amount.
Personally, I like to adequately feel like I am prepared for financial Armageddon. I keep a 10 to 12-month emergency fund. I came to that amount because I own an older home, and drive an older car. Even though I don’t have kids, minimize expenses, and prioritize my health, I still prefer to be a bit conservative in my cash savings. Yes, that’s money not earning me much interest, but I invest more than 20% of my income, so I am not worried about money sitting in the bank. For me, it gives me peace of mind knowing I have a bunch of scenarios covered.
Your comfort level will be different: plan accordingly!
Whether you choose to go lean or conservative, your lifestyle has to support it.
Both approaches have their pros and cons, you just need to pick what’s right for you.
As the variables change, continue to reevaluate and adjust.
Based on your lifestyle, what did you decide and what did you base it on? Leave a comment below!