How Much Emergency Savings?

Nov 18, 2011 by

How large should your emergency savings fund be? I wish I knew.

The standard answers to this question—three months of expenses, six months of income, and the like—are bogus, in my view. I couldn’t begin to guess how much your Emergency Fund should be without knowing the specifics of your job(s), family, financial situation, and lifestyle.

You should have an emergency savings fund, or be working toward building one. To decide how large it should be, consider:

Vulnerable to Income Loss → Larger Emergency Fund

  • If your household has two wage earners, are both incomes needed to cover your family’s basic expenses?
  • How secure are the family wage earners’ jobs? Are the industries in which wage earners work growing or shrinking? If the family wage earners work in the private sector, are their employers profitable? And are the family wage earners valued by their employers or do they have seniority?
  • How marketable are the family wage earners’ skills?

Vulnerable to Unplanned Expenses → Larger Emergency Fund

  • Do you live in an older home with older appliances and fixtures?
  • Has your car logged a lot of miles?
  • Do family members have a history of health problems or chronic illness? How large are your insurance co-pays and deductibles?
  • How large are your auto and home insurance deductibles?

High Debt Payments → Larger Emergency Fund

  • How much debt do you have?
  • Does your mortgage include a grace period? How many payments could you miss before your lender gets mad?
  • Do you owe money on a car you need to get to work?

In short, I try to understand the risks we face—and the above are examples, not an exhaustive list—in judging how large an Emergency Savings fund we need. I ignore one-size-fits-all advice, and instead figure what we’d need based on our situation. And to be sure it’s secure and liquid, we keep our Emergency Savings in an FDIC-insured bank account.

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