Emergency Fund Planning: Don’t Assume Expenses Will Go Down

One of the more common questions in financial planning is how much to save for an emergency fund. It’s sort a personal question, really, I mean the answer to the equation is personal. Some people feel quite comfortable with three months of basic expenses set aside for a rainy day. Others, like me, have a goal to save one year of basic expenses in the event I lose my job, or am unable to work.

What are Basic Expenses?

Regardless of your goal in terms of the number of months you prefer to have saved, you must first conduct the important exercise of listing your current expenses, and then identifying which of those you would cut in an emergency. What’s left is often referred to as “basic” expenses. Consider things like electricity, car insurance, gasoline, food, and of course, rent or mortgage payments.

In my family we have agreed a number of things we pay for today could be easily dropped tomorrow if we lost our income. The gym membership would have to go. Cable and other entertainment options would be eliminated. I’d probably keep Netflix because streaming movies and television shows is such a cheap entertainment option. I’d also keep internet access and at least one cell phone active for job searching, networking, etc.

Conventional wisdom is that our monthly budget would actually go down considerably if we lost our income. Not so fast.

Accounting for New (Increased) Expenses

It wasn’t until I performed the exercise of listing our current expenses and then putting together our “emergency” budget that I realized our expenses would actually go up; not down. This concerned me because I had always assumed I needed less emergency fund since we’d be reducing our monthly expenses in an emergency.

I had not considered things like COBRA insurance, a costly way to keep health insurance coverage for up to 18 months (even longer, in some scenarios) after separating from your employer’s plan. I asked around and found out that COBRA can run as much as $1,500 a month for full family coverage. Essentially, you are paying both sides of the insurance premium, where your employer used to pick up a substantial portion of the costs.

Sure, you may be able to ultimately find a cheaper health insurance plan, but for the first month or two you are probably going to be preoccupried while scrambling to find work.

So even after cutting the cable, reducing our entertainment budget, and eating beans and rice all month, there was little chance I could make up for the increased costs of COBRA. But that wasn’t the only increased cost to consider.

Imagine if you were laid off in 2009, when gasoline for the average family worked out to about $173 a month. In less than a year, your monthly budget for gas budget would have increased to $281.06, an increase of over $100 a month. Sure, if you weren’t working you wouldn’t be commuting, but job hunting would still have you out and about burning gas. Today, many households are paying over $400 a month for gasoline.

Also be sure to account for food inflation. If your household grocery budget looks like mine, it seems we are constantly having to raise our food category. Not necessarily because we are buying more, but because the prices have gone up while the product sizes go down. Corn has almost doubled in the past 12 months.

When planning how much to keep in an emergency fund, don’t assume your post-emergency expenses will be significantly lower than your current expenses. In fact, it might make sense to save x number of months times a small increase to your regular expenses.

If you normally spend about $3,000 a month, and aim to save 6 months of expenses, normally you would anticipate a healthy savings balance of $18,000 to cover you. However, one could make an argument for rounding that up to $20,000, or even assuming a new $3,500 per month budget and saving $21,000 in an emergency fund.

I do believe you can save too much in an emergency fund, because money in excess of one year of expenses should probably be exposed to more risk, and therefore more opportunity for growth, than a money market account. However, I’ll finish this post the same way I started it–saving for emergencies is personal, based largely on your individual budget, and you and your family’s appetite for risk.

If saving 18 months of expenses helps you sleep better at night, then by all means, build that cash stockpile. If you and your spouse’s jobs are steady, you have other investments you could liquidate penatly free (Roth IRA contributions, etc.) and you’d like to only save up 3 months of expenses, then only save 3 months of expenses. Just be sure to save adequately for those three post-emergency months by not underestimating new expenses.


  1. Another thing to consider is that you might be locked into contracts with your cable company and your phone carrier. You could be looking at paying $350 to get out of your smart phone contract or a couple hundred for cancelling your cable.

    • Good point, particularly when it comes to cell phone providers. Fortunately, my gym membership is month-to-month, which seems to be more popular now than it used to be.

      • While you may not be able to cancel cell phone contacts early with ease, you can sometimes put them on hold temporarily. So that’s another option.

  2. I was thinking about this last night. If your company is subsidizing any of your expenses (discount on phone plan; mileage reimbursement, etc.) your costs are artificially low while you have a job and your emergency fund should account for those higher costs if you lose your job.

    For example, I get a 20 percent discount on phone service because I’m an employee of X company. But if I lose my job, I will lose that discount.

  3. Don’t forget, if you work for someone, rather than being self-employed, you
    will be eligible to collect unemployment for up to 6 months, which will help.

  4. I do think people forget about the extra expenses that we will occur without our jobs. If you have a second job or a spouse you may be able add to another group plan which would be cheaper but if not, yes you would probably need more money for COBRA.

  5. Don’t forget the increase in the cost of utility. Once you are home, you need to keep the furnace/air conditioning on all day, especially in really cold/hot climates. Plus you’ll use more water and electricity.

    This was a shocker to us when I stayed home with our first child. We did not anticipate a 30% increase in utilities.

  6. Usually your expenses will go up because something always unexpecting happens when you try to save extra money.

  7. I just read an internet article that for just let go workers 55-64, the average length of unemployment now exceeds 1 year.

    So in the Great Recession, even a 1 year emergency fund is not long enough for a good many people.

    • Good point. Depending on circumstances (age, etc.) it might be a good idea to pile up even more cash. I’m not a market timer, but something tells me we’re inflating the bubble quite a bit any way in stocks, so it might be a good time to add a little more to your cash position dedicated to emergencies.

  8. Commodity prices affect most people’s budget only a small amount. Sure, if you eat home-made tortillas or a few bowls of rice every day (as I do) the cost of rice (or whatever commodity) will directly affect you. But for processed products that commodity is a much smaller %. The rise of commodity prices affects those in the developing world way more than us for the most part.

    Even my food budget – and I purchase only unprocessed foods and cook all from scratch – has not gone up significantly in the past year. It was $165/month a year ago, and now it is $170. Commodities get turned into other things and their base cost is still cheap. My 25# sack of rice may have gone up from $18 to $25, but it still lasts me 6 to 9 months, and the cost per serving is pennies.

    If you know how to cook, and you shop smart, food cost increases are minimally impactful.

    I live in San Francisco – not a cheap place to live – and am self-employed. And my health INSURANCE budget (not health care, just the cost of insurance alone) is 2x my cost of food. Add in all the co-pays and deductible and my health care costs – for a young healthy person taking no drugs – is 3x the cost of food and going up about 20% to 40% a year – every year. The cost of that sack of rice rising to $25 is insignificant compared to that.

  9. Great pointers, thanks so much! So well thought out.
    One thing I do have to say is, that being out of work is
    extremely stressful (it’s happened to me), and that things
    like gym memberships really help to keep the unemployed on
    track – and healthy.
    Also – cutting back to the point of deprivation can cause some
    people to overspend, or spend impulsively after a while.
    So – I always add in things like, maybe less expensive
    exercise options, and occaissional meals out (maybe at a discount,
    or places whre there’s no waiter service),
    so that we can feel grateful and positive.

    Thank you!

  10. I honestly hadn’t thought of the fact that we’d need to make COBRA payments for our family if my husband lost his job. Our emergency fund covers six months of our current expenses, but it does not cover this extra expense. Our targeted funds and opportunity fund cover nearly all other emergencies, but our EF is specifically in case of my husband losing his job. I’m a stay-at-home mom so we’d have no choice but to make the COBRA payments.

    This seems like a major oversight on our part. Thank you for pointing this out. I’m going to talk with my husband tonight about beefing up the EF to cover this very necessary expense.

    • What I found when I was unemployed, that my unemployment insurance, after deducting court ordered child support, was less than my court ordered COBRA payments (I had to have health, dental, and vision for my child, whom my spouse had sole custody for).

      And of course, the court ordered a one time child support payment out of my severance pay. After court ordered child support (which is not tax deductible) and required tax payments, very little was left of my severance pay.

      I have two friends who got no severance pay, and furthermore, their employers contested (and successfully won) paying them unemployment insurance when they got laid off. I think I read somewhere that only about 2/3rds of laid off people collect unemployment insurance because employers contest paying them (which raises their unemployment premiums significantly). If I have time I’ll try and find a link.

      So, in many cases you can’t count on unemployment insurance or severance payments to help bolster your emergency fund.

  11. I have heard so many horror stories about long unemployment times that I am saving 2 years of expenses in my EF.

    • And to think that as little as 4 years ago the commonly accepted wisdom from trusted and experienced paid financial advisers was that most people needed only 3 months normal expenses in their emergency fund a a few people would need as much as 6 months normal expenses in an emergency fund (but with an aside that 6 months normal expenses in an emergency fund was probably overkill).

      Shows you how little professional paid financial advisers know. Frugal Dad knows better than them and his advise is free!~

  12. I couldnt agree more… best to assume, at the very least, that your expenses will remain steady. That way if you have a cash windfall, raise, or decrease in expenses, that will only add to your savings instead of depleting them.

  13. Save as much as you want as long as your budget still fits in. Though it will be really better if you save more to what is needed just to be prepared for the long run in case you’ll be unemployed.

  14. This is wise advice. Keeping an emergency account and over funding it, has provided great peace of mind. Very difficult to get started and very hard to keep, but after the recent economic climate, two years or more of unemployment fro people in my home State was not unusual.

  15. This is wise advice. Keeping an emergency account and over funding it, has provided great peace of mind. Very difficult to get started and very hard to keep, but after the recent economic climate, two years or more of unemployment for people in my home State was not unusual.

  16. Maybe you can also make a list first of what are your priorities for the emergency fund. Most likely food is on top, next can be insurances or house bills. Its better that you construct a straight path before hand so you can check anytime if you’re sticking to the plan.
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  17. Another forgotten about change in expenses are things like car repair. I know many people who got used to having no car payment once the loan on a new car was paid off, but never saved or increased their budget for costly repairs or car replacement once their car starting hitting that age where they need costly repairs.

    I realize this isn’t an ongoing expense like food and fuel, but it’s often overlooked and if it was budgeted into emergency savings it would less likely to cause a major problem when it eventually happens.

  18. Great points, I think we often assume our expenses will go down when we start cutting things we consider non essential from our budget. But in my experinence there always seems to be another expense that comes along or even the unexpected expenses happen.

  19. For the record, household expenses dont really go down. Though sometimes we receive some rollbacks but most of the time it increases.
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  20. Good advice here. Though I was fairly well prepared for last fall’s division-wide layoffs [I’d previously researched my state’s unemployment compensation–Delaware pays a maximum of $330/week pre-tax!–and based my emergency budget on that amount], one increased expense I didn’t anticipate was the heating bill. The automatic thermostat used to keep the house quite cool while I was at the office all day, but being home more meant using more heat.