Emergency Funds – How Much Do You Need?
Raise your hand if you’ve heard this one – you should have $1,000 in an emergency fund at all times.
Popularized by Dave Ramsey’s “debt snowball” plan to help folks get out of debt, the $1,000 emergency fund is a popular trope on personal finance blogs.
Imma burst your bubble. $1,000? Not enough.
Not nearly enough.
In fact, I’d argue that $10,000 is not even enough! But then again, look who you’re talking with!
Look, if you’re in serious debt repayment mode or very much living paycheck to paycheck and $1,000 is all you can scrape up for an emergency fund, then that’s fine. That’s better than nothing, after all! And you should be proud of yourself for pulling that together.
According to a 2015 article on CNBC.com, fully one-third of Americans (30% for all you math nerds!) do not even have AN emergency fund. Let alone $1,000 set aside.
So, how much should you have saved up? Well, that same article argues that you should have between 3 to 6 months of expenses saved up in case of job loss, or, well, any other emergency situation.
I think this is a fair amount to have saved up, and would lean towards to be more conservative and saving up the full 6 months worth to be on the safe side.
But there are a couple of things I think could help people understand an emergency fund, and then decide how much they actually want to save up.
1 – Emergency Funds Need to be Easily Accessible
Your retirement accounts are NOT your emergency fund. If you withdraw money from your 401k or Roth IRA before you’re old enough to qualify you are going to suffer heavy penalties on that withdrawal! Don’t do it! Keep your emergency fund in an investment account, if you’d like, but make sure you can access that cash quickly and easily if and when you truly need it.
2 – 6 Months of Emergency Bills is NOT EQUAL to 6 Months of Your Regular Spending
If I was ever in the situation where my husband and I were both not working, having a 6 month buffer to find a new job and start making money again would be amazing. But let’s break this down for a second. Let’s pretend I spend $5,000 a month just living life, paying my mortgage and car payments and everything… Each month I spend $5k.
I don’t need to have 6 full months (30K) of ALL expenses saved up for my emergency fund to work. If I was in a situation in which my income became drastically unstable the first thing I would do is cut all unnecessary spending. That means, cell phone, Netflix, dinners out, EVERYTHING. If I cut all those things, suddenly I don’t really need $5K per month to survive. Maybe I only need $3500. So, instead of saving up 30K for my emergency fund, I only need to set aside $21K to have six months of barebones expenses covered.
Do you see where this is going?
3 – Emergency Funds Should Not be Used as “Whoops, I spent too much at Von Maur this month” Back-Up Plans
People save up a big chunk of change in their emergency funds, pat themselves on the back for achieving their goal, and then immediately start spending that money! Don’t do that you stupid idiot. Leave that money alone!
So, while your emergency fund should definitely be easily accessible. It should not be so easily accessible that you are tempted to want to tap into it all the time in order to fund non-emergency things.
Emergency funds exist as a safety net. To make things like losing your job or an illness or a flooded basement a little less scary.
If we take the time to feed our emergency funds and keep them healthy and happy, they’ll take care of us in our worst times.
You can use SmartyPig or Digit to help you save for your emergency fund. There is no wrong way to start socking away a little extra cash. $5 here and there can really add up after a while. And you’ll thank your past self when your future self needs it.