How do you calculate the "ideal" amount for your emergency fund?

[taubel]

I'm trying to determine how much DH and I should have in our emergency fund. We have three jobs between us, and our living expenses average about $4600/month (this includes EVERYTHING in the budget, including oil changes, summer pool membership, etc.)

If we wanted to have 12 months of living expenses, we'd need more than $55K in our fund - which we don't have!

But since we have three jobs, it's unlikely that we'd lose all three jobs at once. DH has a full time job, which is where most of our income comes from. At my job, I make about 27% of his full time income. And at DH's part time job, he makes about 11% of his full time income. 

Can we safely base our emergency fund amount on JUST the income from his full time job (since that's the highest income and would "hurt" the most to lose)? What would you do? 

Thanks.

[root*children]

I appreciate and follow Dave Ramsey's advice there, that it should be 3-6 months of income.  Longer if you're a single-income househould, lower if you both of you are working.  I, personally, also wouldn't factor in things like a pool membership - because if you're seriously using your emergency fund, like if your DH broke his back or something and you're living off emergency fund and you are working all the time, I doubt you'll be lounging by the pool much :)

[EmsMom]

Personally, I would shoot for one year of very basic expenses but fully acknowledge this would take a very long time.  In the meantime I would certainly go about putting monies away for retirement, towards my next car purchase, etc.  But I would strive for the one year before I did things like pay for really big ticket items (actually I am really just not a big ticket item kind of person so it is probably not applicable).  And BEFORE I was putting that kind of money aside I would absolutely make sure I had decent life insurance (if there are dependents), disability insurance (to provide income in case of major disability), and major medical insurance of some kind.  If you have those things in place and can expect to earn unemployment if you should get laid off, you pretty much would be covered with a smaller emergency fund.  But I am always a person who likes to feel nice and secure. 

I wonder if the real question is how much of an emergency fund should I save before I can buy _____ .  That answer would depend on what is in that blank.  If the blank is say, a modest house at a time when housing prices and interest are low, I would go for the house (and then continue to save).  If that blank is a baby (well, hopefully you wouldn't be  buying one of those..) and you are 39, go for the baby.  If you are 19, well, I would save a little more first.  If the blank is a fabulous once in a lifetime luxury vacation on a yacht, well you might be on the wrong boards....

[crunchy_mommy]

I would like to have 1 year of essential expenses -- mortgage/rent, utilities, and food. I would not factor in non-essential utilities like cable or internet, and certainly not the pool. Certain insurances might be something you would want to include too, depending on your circumstances.

My DH was laid off almost a year ago. He's eligible for unemployment for about 2 years. Unemployment is kind of minimal -- we can just barely pay our mortgage and electric bill on what he gets (fortunately I work too, part-time, so we're able to cover all the basics for now). There is no money leftover to add to savings each month, even though we've cut back on all unnecessary spending. If he can't find a job within the next year (a very real possibly, given the local economy), then we will need to live off of our savings. So the emergency fund needs to be complete BEFORE disaster strikes, because you can't often add to it during an 'emergency'.

You also need to factor in how an emergency could affect your expenses. Say your DH broke his back -- he would not be able to care for your children, so you might need to pay someone to watch them or give up your own job to do so. This is why I would base it on living expenses rather than income, because sometimes the loss of one income means the loss of both. Depending on your medical insurance, you could also end up with really high medical bills, so if you have a high deductible plan, you might want an amount equal to your deductible in your fund or HSA. Things like that...

But, I don't believe your whole life should go on hold while you build up an adequate emergency fund. I think once you've got 3-6 months saved up, it's OK to relax a little and allow yourself a bit more spending money. I would want it completely funded before contemplating expensive luxuries though.

[SunRise]

My goal was/is to get 3mths, then work to 6mths then up to a year. (I am at 4mths right now).

BUT the amount I am aiming for / month is at a scaled back monthly budget then what I live off of while I am working. You may consider what you will scale back on if living off of your emergency fund. For myself it is dropping health insurance (which is 20% of my monthly expenses) and daycare (10%). And reduce savings from 20% to ... very little (just to keep in habit)!  I also factor in the possibility of extra earnings by picking up babysitting jobs for instance (since I have a toddler). Its not part of the scaled down budget, but it may extend the emergency fund by a month or two.

[TiredX2]

Originally Posted by crunchy_mommy 

I would like to have 1 year of essential expenses -- mortgage/rent, utilities, and food. I would not factor in non-essential utilities like cable or internet, and certainly not the pool. Certain insurances might be something you would want to include too, depending on your circumstances.

My DH was laid off almost a year ago. He's eligible for unemployment for about 2 years. Unemployment is kind of minimal -- we can just barely pay our mortgage and electric bill on what he gets (fortunately I work too, part-time, so we're able to cover all the basics for now). There is no money leftover to add to savings each month, even though we've cut back on all unnecessary spending. If he can't find a job within the next year (a very real possibly, given the local economy), then we will need to live off of our savings. So the emergency fund needs to be complete BEFORE disaster strikes, because you can't often add to it during an 'emergency'.
 

So, when you calculate that year of essential expenses, do you take into account the unemployment? 

 

Originally Posted by SunRise 

My goal was/is to get 3mths, then work to 6mths then up to a year. (I am at 4mths right now).

BUT the amount I am aiming for / month is at a scaled back monthly budget then what I live off of while I am working. You may consider what you will scale back on if living off of your emergency fund. For myself it is dropping health insurance (which is 20% of my monthly expenses) and daycare (10%). And reduce savings from 20% to ... very little (just to keep in habit)!  I also factor in the possibility of extra earnings by picking up babysitting jobs for instance (since I have a toddler). Its not part of the scaled down budget, but it may extend the emergency fund by a month or two.

This is really interesting to me (the way you figure it). I've tried to figure out what we "really" need as well.  I always include *extra* for health insurance, though, figuring that we would not longer have an employer sponsored plan AND might have some major medical bills (since injury/disease would be a major reason for job loss/emergency).

[SunRise]

The health insurance aspect... interesting perspectives. Yeah, I do not think of using my emergency fund based on getting into an accident (which I guess can happen, but it never occurred to me)! I think of it there for job loss purposes (laid off) and in my case I'm self employed so that is more in the forefront of my thinking.  And since I am self-employed I am self insured which costs a lot $$ (20% - in fact I just categorized by % my budget and H.I is my highest monthly cost and the next highest is 16% which is mortgage) of my monthly budget. I figured if I lost my income, I would no longer be able to afford health insurance premiums. And my kids could switch to medicare.  Several years ago the company I worked for went under and I had the option for Cobra @ (extending health premiums due to unemployment) $750 / mth. I laughed at that...I had just became unemployed and 750$ / mth was not part of my scaled down budget (while employed it cost me $150/mth). Actually, I'm also Canadian living in the States, so part of my perspective is if I lose my job then I return to Canada and health insurance costs is no longer part of the factor.

[crunchy_mommy]

Originally Posted by TiredX2 

So, when you calculate that year of essential expenses, do you take into account the unemployment? 

I take into account nothing... I calculate it as if we would have absolutely no income, so whatever I need to survive for a year is the amount I am aiming to have in my emergency fund. I don't want to rely on unemployment because what if DH or I were fired, or sick but not sick enough for disability, or UE or disability ran out, or the gov't stopped providing benefits, or we were in some kind of natural disaster... obviously I am a worrier and I may be going overboard but I'd rather have more than not enough. Plus, our emergency fund is also what we dip into if we need to do major household repairs etc. so I need a little padding in there. I was hoping to quit my job last spring & I liked the security of knowing we could live without my income.

Right before DH was laid off, his car blew up, so we needed to buy a "new" (used) car -- we wouldn't have needed to if we knew he'd be laid off lol but we didn't know that until a week or two later. Then after that, our computer died, and DH needed a computer to look for a job, and we had a few other issues... so all within the space of a month or so, we needed thousands and thousands of dollars (plus it was Christmas so we'd just spent a lot on gifts and all). Somehow there was some hold up when DH filed for unemployment and it was many weeks before he started getting UE checks. I really do not know what we would have done if we had not had a large emergency fund. We wouldn't have been eligible for a loan or whatever since he had no job and I only work PT. Sorry, I'm rambling & probably no one wants all these details lol. My perspective on emergency funds has changed quite a bit due to our recent experiences.

[Smokering]

This is all fascinating! We're kinda new to being sensible with money - at least, we're not in debt, but we don't seem to be any good at saving. So I'm trying to learn all these things...

Where do you keep your emergency fund? Do you have a separate account for it? DH and I have one cheque account and one higher-interest account that can't be accessed with a credit or debit card (you have to transfer money to the other account for it to be usable). We keep a few hundred in the cheque account and the rest in the FastSaver (the higher-interest account). I assume this is a fairly normal system to use? Do you guys just keep the emergency fund in the savings account?

I'm ashamed to say I don't even know what we spend in a month. I know rent, but I think our power bills fluctuate wildly, as does our grocery budget (we're trying to be more frugal with that). If we suddenly lost all income we'd be a lot more frugal, of course... I'll ask DH if he can tot it up. It seems like a good goal to have, especially as he's self-employed.

[Ragana]

We have about 2-3 mos. worth of expenses right now in our emergency fund, which we keep in a separate "untouchable" savings account without card or check access. I keep putting a little in there each month, and eventually I'd like to have 6 mos. I am freelance and DH is permanently employed. We also try to keep $1-2k in a savings account linked to our checking account for planned, short-term savings. We spend that on larger purchases and then top it up again. For instance, we took a family vacation this summer with that money, and next up is braces for DD, then a car repair coming up in a year or two that will likely cost $1k.

[crunchy_mommy]

Originally Posted by Smokering 

Where do you keep your emergency fund? Do you have a separate account for it? DH and I have one cheque account and one higher-interest account that can't be accessed with a credit or debit card (you have to transfer money to the other account for it to be usable). We keep a few hundred in the cheque account and the rest in the FastSaver (the higher-interest account). I assume this is a fairly normal system to use? Do you guys just keep the emergency fund in the savings account?

Yeah, I think our system is similar to yours. We have checking which we use for all our bills & short-term savings, and then a separate online-only savings account which we don't touch except for things that we deem emergencies (buying a new car, major home repairs, job loss, etc.) and if we do have to tap into it, we replace the money ASAP. It's like yours, we need to transfer the money into our other bank's checking account to be able to access it.

I actually do have our mortgage taken from our savings though because we make more interest that way. But I make sure to add the mortgage money to the savings account every month.

[EmsMom]

I keep $1000 in my checking account which will cover me if i make any mistakes with my checking account balance or just need a quick car repair or something.  The rest of it I keep in an on-line savings account.  If I ever got about 10000 or so I would look around for a higher interest rate.  Sometimes if you keep such a high balance you can get better interest.

[ilovemygirl]

I'd feel great with six months based on our monthly expenses not monthly income and I think the "ideal" would be a year's worth. Right now I've made it up to 3 or 4 months and I'm not really comfortable with that. I base it on what I spend now because even though we would cut back a lot of things in an emergency we would need to spend more on others. 

Medical is also a HUGE thing for us. Both dh and I have some serious issues that we see specialists and take medication for. We would have to pay the cobra no matter what it cost ...

We also keep the funds separate in an online account. 

[SunRise]

I have a checking account which I draw on for monthly expenses/spending.

~acct#1: savings "house" account (mortgage payment plus a bit extra each month for unexpected (but expected) house emergencies (water tank, new roof kind of thing), & renovating $$ ( kitchen renovations)

~acct#2 emarket acct : 1yr living expense acct. not a very good interest rate and only accessible by transferring it back to checking acct. BUT when the savings gets to 6mths I will research a better savings set up. I would only keep 6mths in this account, and 6mths in a higher earning acct., cd or whatever is best when I reach that goal.

~mutual fund for long term savings/retirement

[TiredX2]

Originally Posted by crunchy_mommy 


I take into account nothing... I calculate it as if we would have absolutely no income, so whatever I need to survive for a year is the amount I am aiming to have in my emergency fund. I don't want to rely on unemployment because what if DH or I were fired, or sick but not sick enough for disability, or UE or disability ran out, or the gov't stopped providing benefits, or we were in some kind of natural disaster... obviously I am a worrier and I may be going overboard but I'd rather have more than not enough. Plus, our emergency fund is also what we dip into if we need to do major household repairs etc. so I need a little padding in there. I was hoping to quit my job last spring & I liked the security of knowing we could live without my income.
Right before DH was laid off, his car blew up, so we needed to buy a "new" (used) car -- we wouldn't have needed to if we knew he'd be laid off lol but we didn't know that until a week or two later. Then after that, our computer died, and DH needed a computer to look for a job, and we had a few other issues... so all within the space of a month or so, we needed thousands and thousands of dollars (plus it was Christmas so we'd just spent a lot on gifts and all). Somehow there was some hold up when DH filed for unemployment and it was many weeks before he started getting UE checks. I really do not know what we would have done if we had not had a large emergency fund. We wouldn't have been eligible for a loan or whatever since he had no job and I only work PT. Sorry, I'm rambling & probably no one wants all these details lol. My perspective on emergency funds has changed quite a bit due to our recent experiences.

No, I really appreciate your answer.  There are *so* many things to consider it really helped reading your perspetive and thinking about things I might not have otherwise.

[onlyzombiecat]

Originally Posted by crunchy_mommy 


Somehow there was some hold up when DH filed for unemployment and it was many weeks before he started getting UE checks.

That was what happened to my dh as well. He actually found a new job before the hold up with the unemployment was finally sorted out so I would say don't count on getting money from unemployment. We were a single income family and if we had not had a cushion of money in our savings we would have had no income at all to live on for several weeks.

I'd probably keep at least 3-6  months of your bare minimum living expenses- food, shelter, insurance and transportation... not the swimming pool membership or cable tv. If you find that you can put away more then I would.

[Carson]

I will feel much more comfortable if we can get 1 year of realistic living expenses in savings.  I started small, with about $10k and just slowly chipped away at adding to it.  We save 12% of my income just to build this emerg fund.  I'm transitioning to part-time and that makes me feel more vulnerable, but we'll have less opportunity to save, so we'll probably be stuck at 8 months for awhile.

DH job is quite secure, but an accident could wipe him out of work, and we would be in trouble.

[sunnysandiegan]

We have four types of savings:

1. Overdraft (free)

~ $500 in savings account directly linked to checking account...I used to leave a padding of $1000 in the checking account when interest rates were better...and this savings was #2 below

~ same credit union for both accounts; both accounts earn interest, but savings earns 3-4 times the checking

~ no fees, auto-transfer to cover any overages, no thinking involved

~ transfers are immediate and both accounts are easy-access (online, phone, in person, walking distance to branch, branches all over the country, cash over at grocery stores)

~ When money is auto-transferred to checking (in overdraft situation), I transfer it back to savings after the next payday online. It is a cashflow issue right now because we are focusing on paying off our mortgage by the August before our DD is most likely to go to college. I have changed all of the due dates I can at this point. Since it doesn't cost us anything, I let it go. We're allowed up to 6 transfers between these accounts per month and we generally have zero or two.

2. Short-term

~ used in a year or less

~ We generally trade off on home improvements (we bought a fixer-upper 11 years ago) and vacations (modest). When we weren't saving for these, they only happened under extreme circumstances, which caused undue stress.

~ online savings account connected to checking account

~ automatic savings program (monthly; no thinking involved) and I change the monthly transfer amount once or twice a year to reflect goals for that year

~ Money transfers either direction takes a few days, which forces us to think ahead a bit -- always a good thing, IMO.

3. Long-term

~ retirement

~ systematic investing program (monthly; no thinking involved)

~ We only have access to IRAs at this time, so we save the maximum allowed by law for each of us.

~ DH has one professional account with multiple mutual funds we buy/invest monthly. (Some are at NAV and some have fees.)

~ I have one professional account with multiple mutual funds we buy/invest monthly. Mine are all at NAV (net asset value, which means no fees) since I used to work in securities.

~ I have one self-directed account with an ETF we buy/invest monthly for a nominal fee. (All trades were free the first year - 2010 - and I decided to continue it due to performance.)

4. Mid-term

~ for use for anything between one year and retirement (20+ years away) or beyond

~ generally thought of as our "emergency fund" in this forum's context, but I think of it (or a chunk of it) as our supplemental retirement savings at this point

~ We have this category of money in several different places...diversification is key to me! I have a higher risk tolerance than the average American because of my education and experience (degree in finance; many years of working in banking/securities). The types of accounts and percentages of money in each type has changed over the years due to the financial climate changes. We have stocks, bonds, mutual funds, exchange-traded funds, money markets, and online savings accounts. We probably even had a CD at some point in the early days, but I generally don't like those due to lack of liquidity and low rates these days.

~ We grew this very slowly after the other savings above (#1 and #3) were established and being funded adequately (not at maximum). I literally started simply by having our checking account keep a minimum of $1k at the end of every single pay cycle, growing it slowly. At that time, though, we both had 401k programs through work and we were both contributing. Once we met my minimum $1k balance at every pay cycle, then we started increasing our 401k contributions up to the maximum for best employer-matching (different for each of us). Only THEN did I work on this type of "mid-term" savings and it was just in the regular savings account back then.

~ We started with a goal of 3 months worth of essential living expenses and it took awhile! Essential living expenses to us are the things that must be paid at least for a few months while the "emergency" gets sorted out. It is challenging to just drop every bill/service just because of an "emergency". You don't always react quickly and cancel all non-essential services/bills because not all "emergencies" are instant. Job loss can even be dragged out; hours cut or pay rate reduced; or severance paid for awhile. Disabilities don't usually show up immediately, either, but rather after many medical treatments (and BILLS). On the flip side, some things seem like an emergency but could really have been absorbed into the budget/spending plan. So you didn't really need to stop the service, but you did and then you have to pay extra to have the service restarted, etc. Bottom line is we went by net pay minus savings plus 401k deductions for the first phase. For example, say direct deposit paychecks totaled $2000 per month and savings were $200 and 401k deductions were $150... $2000 - 200 + 150 = $1950 x 3 = $5850.

~ Once we hit the 3 month mark, we never let it drop below that dollar amount. We used some of money to pay for a new car when the transmission blew on DH's car and we were both working. Neither carpooling nor public transportation were an option at that time. (We were borrowing a friend's car as it was for a month while the "emergency" was sorted out.) We had more than 3 months in this fund and only used up to that 3 months worth mark...not a penny more.

~ Our next goal was 6 months worth of essential living expenses. This process picked up speed due to compounding interest and focused attention.

~ Once we hit the 6 month mark, we never let it drop below that dollar amount. My car needed replacing at some point after this and we repeated the above. Compounding interest and the habit of saving really paid off by this time. Somewhere in here, we also re-evaluated our definition of essential living expenses. I literally went through our exact spending plan (average monthly amount based on the coming year) and calculated what dollar amount for each line item would be required in an "emergency" situation. Gas would drop, but car repairs would not. Our vehicles are older and we need to maintain them well. Auto insurance and registration would stay the same more or less. Personal funds for each of us could drop immediately, but it depends. DH's is direct-deposited via payroll. If he lost his job and continued to receive severance, then it would continue. (It takes 1-2 paychecks for changes to take effect.) DD & I receive our cash portion via a monthly walk to the local branch, which simply wouldn't happen. My investing play money, though, is auto-transferred and takes a few days...timing would play a part in how quickly that would be discontinued. DD's college savings would only be changed under dire circumstances. All the nuances are taken into account and we reached a minimal monthly dollar amount. I use that new number for all my "essential living expenses" calculations now.

~ Our next goal was 9 months worth of essential living expenses due to the "new" financial climate. By this time, our income had gone up nicely and ironically this process took awhile until I specifically pointed us in this direction at the exclusion of most other discretionary spending. This really required a LOT of focused attention towards savings and ignoring our rising income and status of living, etc. We have experienced double job loss back during the previous recession and survived well due to our savings, so I was motivated to catch us up to those standards at current market conditions. Thankfully, we didn't need the funds.

~ It took us a really long time to get to a full year's worth of essential living expenses. Our income now makes this challenging. Plus, the changing financial climate has sent interest rates plummeting and investment returns are soooo low that I have had to spend a lot more time managing these accounts. One might think this would be more motivating and they'd go up quicker due to the attention. Hmmm.... Not so. Instead, I watched how pathetic they grew despite throwing money at these accounts and chasing the highest interest rate, etc. The majority of these funds are in very stable, fully insured accounts. A certain percentage, however, is not and that chunk fluctuates so much that we've just been hovering at the 12 months worth amount for a year or so even though we still contribute monthly to the very stable portions (at much lower dollar amounts now that we've turned our attention towards paying off the mortgage in less than 8 years).

I want to point out that we had consumer debt at various points in our financial progress. I believe building savings is just as important as reducing debt once you have it. If you never get into debt, then that's even better. Unlikely for most people, but it's all relative.

Super long....I hope it helps someone! I appreciate the experience of thinking it all through and typing it all out. Best wishes to all!

Edited by sunnysandiegan - 10/1/11 at 10:12pm

[heatherdeg]

We have one income so our emergency fund is 12mo of essential expenses (stuff we CAN'T drop) BUT I did NOT account for health insurance COBRA payments.    Thanks for that!

We keep ours in a savings account that can't be accessed by any cards.  And we don't consider unemployment because it's miniscule.  If/when we get it, hopefully we can just offset what we need to pull out of our emergency fund (or hey--maybe THAT will cover the COBRA payments!)

We have two other checking accounts: one is for the main, monthly bills and the other is for the occasional bills/sinking funds (car repairs, gifts, clothing, etc.)  Dh's pay is split and then direct deposited into each of the accounts as we need it (and he can change the amount online if/when needed).

[taubel]

OP here...

Thanks for all the great responses and ideas!

I too did not think about COBRA. That would be expensive for a family. I suppose I could keep our living expenses the same for the EF, but just substitute our extras (like the summer pool membership) for the cost of COBRA. 

We are going to aim for one year of living expenses, minus the income from our two part time jobs. If I calculate it this way, we already have a year's worth of living expenses saved up. 

This seems like a huge amount of money to be kept aside for a "just in case" scenario. Would it be OK if we dipped into this money when necessary - like say for a new roof, or if our sewer line needs to be replaced, etc.? (We would of course try to re-build the fund after paying out for this type of expense, but it would take us YEARS). 

Thanks again for all the responses.