How much money should be in an emergency fund?

[taubel]

We are trying to establish an emergency fund. We have $10K in a savings account that we don't plan to touch - unless it's an emergency, of course. This is probably not enough for a family of 5, but it is what we have at this point.

We do have other investments, and both DH and I have money in our 401(k) accounts. 

Would the investments and 401(k) count towards an emergency fund, or do we need to have a separate amount in a basic savings? 

Thanks!

[Smidge]

Nice job on saving $10k :D

DH is self employed and we are still trying to reach the 6mo of expenses emergency fund.  They say for employees it should be 3 mos.  I don't count investments/retirements an emergency fund.

[TiredX2]

I would definately not count a 401K--- sure, you *could* cash it out, but the point of an emergency fund is so you don't have to do anything drastic (like cash out your 401K or sell your house...).

For me, the investments would be a maybe.  What are they for?  What are they invested in?  We have some stock that we consider our back-up emergency fund--- we would have several months to cash it out given an emergency (while we used our liquid emergency fund).  Generally, though, you don't want to have stocks/mutual funds as an emergency fund because you could have to sell them as a bad time.

[sunnysandiegan]

I call our mid-term savings an 'emergency fund' on this board, just to keep the lingo similar. However, we actually have three levels of savings (short-term, mid-term, and long-term) and that is how we think of them. Plus, we keep a cushion in our checking account to smooth out the highs and lows in any given month. I think it is important to figure out what all this means to you and your family versus following a standard formula.

To compare our finances to common terms I see here:

~ Our baby savings fund (typically seen around here as $1K) is the cushion in our checking account. However, I keep it anywhere between $500 - 1000.

~ Instead of separate "sinking funds", we budget an entire year (called our "spending plan"). We average all expenses over all 12 months for the "budget" aspect, which I call the "monthly averages". The actual spending plan shows the proper amounts in the correct month (when paid...cash based accounting methods). For example, one car registration is due in January each year and the other is due in February. The estimated figure is in the month it is due and $0 are in the remaining months. The very last column in our spending plan has the total of the two car registrations divided by 12. I see our actual inflows and outflows each month and I also know the average of what it should be in advance. It is easy to see when a category is underfunded or overfunded on paper.

~ We separate out healthcare costs in an HSA because we were eligible for 12 months, which spanned two calendar years and we were able to max it out per law (prorated) for both years. We didn't need to spend it all, so we are still allowed to keep it open and use it for qualified expenses. We also separate out vacation/travel expenses and home improvement projects. We have one account (short-term savings) that we contribute to monthly and one year we use all the money we've put in that account for home improvement projects and the next year we use it all for vacations/travel. We figure if we are doing a lot of home improvement projects, then we don't have extra time for traveling....and if we are spending money on vacations, then we aren't able to save it for home improvement projects. Win-win for our family!

~ Our mid-term savings is comprised of multiple accounts, including insured money market accounts and investment money market accounts and stocks and mutual funds (various levels of liquidity and risk -- my risk tolerance is fairly high, so YMMV). Our purpose for this money is multi-fold. First, it is intended to cover our needs in the event of an emergency income situation (job loss, for example). Next, it is meant to reduce our dependence on credit. We use debt on purpose, but with wide open eyes. We paid most of each car (different years) in cash, but we did purposely take out auto loans as well. In May 2009, we had a major flood and we took on two zero-interest consumer loans to pay for big ticket repairs/items while the insurance check sat in insured accounts earning short-term bonus interest. We paid them off before any interest had accrued and came out ahead. (FWIW, our credit scores are each over 800.) Another purpose for this money could be college tuition for our child. We'd rather have the money technically be in our name versus our child's name for potential financial aid purposes. (Although, we actually have a different plan for college, so this is more of a back-up.) Lastly, the ultimate use of these accounts will be (unofficial) supplemental retirement. As newlyweds, we aimed for one month of living expenses. As new parents, we aimed for three months of living expenses. Over the last few years, we've slowly increased it to 6-9-12 months (one year of essential living expenses is our year-end 2010 goal). We have minimum balances we require of ourselves as we slowly add to these accounts -- once we pass certain thresholds, we don't allow the aggregate amount to ever drop below those thresholds.

~ Our long-term savings is formal retirement (IRA/Roth). We had 401ks at earlier points in our careers and we rolled them over as things changed (firms no longer offered 401k programs or changing jobs and new company didn't have 401k and old company was no longer in biz, etc). DH's company doesn't offer a 401k program, so all of our retirement funding is limited to the government's cap of $5K per IRA per year. That sounds like a lot when you are in your 20s and early 30s. About mid-30s, it seems do-able. We're in our early 40s now and it seems too little. Hence the above bullet point of supplemental retirement. We live in a high COL, so YMMV.

We've only been able to accomplish any of this by continually reducing expenses and living within our means as a family (especially purchasing a home we could afford from the get-go). DH brought a lot of debt to our relationship and I had plenty of debt while putting myself through college (years before we met). It may sound all rosy now (and it certainly is easier), but it has been challenging along the way.

Anyway, I typed all this out in order to encourage the OP (and others) to critically assess your own finances and what money means to you and your family. All the "popular terms" are fine, but do they make sense for YOU? As unpopular as debt is right now (and I caution people to use it wisely, not go crazy), I strongly feel credit/debt is an important finance tool and it has it's place right alongside savings. I advocate building savings AS you reduce debt, concurrently (at the same time, in different percentages), not successively (pay off all debt, THEN build savings). Too many of life's uncertainties can and do pop up when you least expect them and having cash on hand simply puts you in a better place to handle them.

Therefore, great job on saving up $10K!   What does that money mean to you and your spouse? (No need to answer, just food for thought...)

Edited by sunnysandiegan - 12/18/10 at 10:13pm

[crunchy_mama]

We keep about $1000-$2000 in the checking as short-term savings, as pp said for things that pop up and variances over the months, I like having that buffer.  (trying to get that level at $2000 all the time, currently it is about $1500)

For longer range we have some savings for things like- replacing our car when it is needed, health insurance(we have a high-ded plan), and 1 yr living expenses.  We are on a 3 yr plan for those things and they should be fully funded 2 yrs from this month.

Very long term is retirement and I don't see that as an emergency fund at all.  It is all in a 401k currently, soon will be opening a Roth account as well. 

I think on the other accts you need to think about expenses that you may have and what you want from that money.  Do you plan to use it for retirement?  Do you just want it for an emergency?  How much do you need for the basic living expenses for a month?

[Hannah32]

I think a year or more of living expenses is the most ideal. That's very hard to get to though.

[sunflower.mama]

Thank you sunnysandiagian!  That's very helpful and I will keep it in mind as we grow.  We are not where we want to be financially, but for us, I need 1K in my savings account linked to checking for comfort, plus whatever sinking funds we have at the moment for preschool, camps, etc.  We do have $14,000 in stocks which could be an EF in event of job loss which is a remote possibility for us, IMO, since DH's job is pretty secure (worked his way up working for state.  Layoffs would impact people with less seniority.  But of COURSE you never say never).  I'd be more worried in a diff line of work or private sector.  Since I consider that such a remote possibility, I ensure that we never touch that $$ by telling myself it's for our daughters' weddings.  That is separate from retirement savings, etc.  I'd like to be in a place where we save for major home improvements and vacations, but those aren't happening until I go back to work.

[Denvergirlie]

I always have $1K in my checking account, I don't count it, but it's there just in case.

I also have 6 months of expenses in my emergency fund held at ING. However, this would not cover COBRA, only the absolute basics. I need to calcuate what COBRA would cost vs basic priavtely paid insurance. Knock on wood we are very healthy and have never yet even met our deductable. But I would like to have basic no frills coverage none the less, but have not saved that amount yet, nor even done that research. 

I'd like to have this at 12 months, but am okay with it at 6 months.

I have a another $3K in a growing land fund, but it's growing very slowly....but it's accessible.

I do not count my 401K or IRA at all when I think of emergency funds as they are investments, not savings.

OP - figure out what your monthly expenses are and consider if you both were unemployed, how much money you would need to live for at least 3-6 months, and save that as a minimum.

** I also do not count any possible unemployment compensation in my numbers either. 

[taubel]

Thanks for everyone's replies!

First of all, I inherited the 10K from my grandparents, so we did not save it up. Wish we did, though. We were given even more $$ than that, but we have used that money for home improvements and to live off of while I stay home with the kids. 

Now that our youngest is 3.5, we are starting to set up a real budget. I work part time, DH has a full time job and a part time job. With that income, we are able to meet our all of our expenses pretty exactly. We have set up a savings account for any "extra" money we get - tax return, work bonus, birthday gifts, etc. We'll use that money for camping trips, car repairs, other unexpected expenses.

We plan to leave the 10K untouched - and hopefully our investments untouched as well! But I suppose we should work up to a higher amount, since we would not get far on 10K if we both (or even one of us!) were to lose our jobs.

This is a great thread for me. There are many ideas on here that are new to me, so I am learning a lot about money! Thanks! 

[Mulvah]

Originally Posted by Hannah32 

I think a year or more of living expenses is the most ideal. That's very hard to get to though.

This is not ideal for me and I, personally, wouldn't keep an ER fund of one year of living expenses unless I had no mortgage.  JMO.

[crunchy_mama]

Of course if you have the year saved up then you could put that toward the mortgage if you desire.  My checking acct. currently pays more interest than the interest on my loan.  By the time I have 1 yr s expenses (in 2 yrs time) it will be almost enough to pay off the house if I desired.  But in our situation it wouldn't make sense, might as well have it in case I need it and earn more money on it.  Besides the fact our house will be paid off in 5y11m from right now anyway.  If you put the money back instead of to the morgage it is there for whatever you need.