Emergency Funds On Steroids

One of the most frequently asked questions in the personal finance realm is, “How much should my emergency fund be?” The question is usually answered with a canned response such as, “Three to six months of expenses.”  Well, I have my own theory on the size of emergency funds, and it has more to do with me sleeping at night than a finance guru’s personal opinion.

Still, at some point excessive savers run the risk of saving too much for a rainy day.  After all, there are plenty of sunny days to take advantage of, and doing so may require a little cash.  Every situation is unique, but as a rule I would suggest not saving more than one full year of income in a fund designated for “emergencies.”  Most (not all) job layoff situations are resolved within one year, and most large emergencies can be covered by the equivalent of twelve months of income.

You may be like us and have savings goals that reach higher than one year’s worth of income.  That’s okay; just designate separate piles of money for each goal.  For instance, when we become debt free I plan to start saving in a “Financial Independence” fund (it’s purpose is self-explanatory) to hold proceeds from my working capital in other investments.  Ideally, I would like to have at least one year of income in this savings fund, if not more, but it will be kept in a separate fund (ING Direct allows you designate separate, or “sub-accounts”–great for separating savings goals).

Some folks lean towards the Dave Ramsey principles of a very small, beginner emergency fund while you are working to become debt free.  I understand the logic behind this idea, but only having $1,000 to our name feels a little risky to us.  I would rather accumulate a minimum of three months of expenses and then attack the debt.  After all, $1,000 doesn’t go very far these days towards household repairs, replacing dead appliances, or surviving a layoff.

So How Large Should My Emergency Fund Be?

The bottom line is there is really no right or wrong answer to the question.  Stop and think about all of your liquid assets and gauge your immediate reaction.  Are you comforted by this amount?  Are you worried it won’t be enough to cover the next bill from your mechanic?

Let that initial response guide you.  If you are not at peace knowing how much you have in savings, add more.  And because men and women often have a different number that makes them at peace, financially, couples should opt for the larger of the two amounts required to make each spouse feel secure.  Once you reach your target amount dedicated for “emergencies,” attack your debts and then move on with your financial life by funding retirement, college for your children, etc.

How much is in your emergency fund?  If you don’t want to share numbers, just tell us how many months of expenses you have saved up.


  1. I would love to have a huge emergency fund, but I also would love to be completely debt free other than the mortgage. I have put away about $7,000. I then spend a good percentage of my income on paying off and saving for my next car, saving for retirement and saving for the kids’ college.

    I have many streams of income so it’s unlikely I’d lose them all at once. That helps make sure I always have some money coming in. If I was working just one job for all my money I’d probably be a little more nervous.

  2. Right now we have a huge emergency fund because it’s also our down-payment fund…so it will be strange when we finally buy and that money is gone. Right now we’re enjoying what, in my mind, is one of the greatest perks of an em fund: peace of mind. Having that much money in the bank makes me feel rich—no matter what may happen, I’m covered.

  3. We have been following Dave Ramsey’s FPU class for 1 year and have paid off major debt. We are currently working on baby step 2. We have about 3/4 of one month saved. Our hope is by June to have 1 1/2 months saved and then be on our way to 3 months.
    Thank you for your blog.

  4. Well…I have $200 in my official emergency fund as I chose to pay off all of my non-mortgage debt first. I just started my fund last week and each pay I will add another $200 until I reach $5,000. This fund is to be protection in case of unemployment or some completely unexpected financial hardship ie. it is not for household repairs or car repairs, etc. as these items are expected to happen and are budgeted for elsewhere.

    Once I reach the $5,000 target in December of 2009 I will continuing to save the $200 in another savings vehicle that is less liquid but has a better interest rate and it will be my phase two emergency fund in case of long term unemployment or some such thing. If I don’t need it for an emergency, then it will be additional retirement money.

  5. Seconded. When it comes to money that may be needed to cover expenses, the old phrase of “too much is never enough” springs to mind. You never know what kind of emergency can crop up and how much it will cost. Due to my wife’s home business really taking off in the last 7 months, we were able to gather over $10K in the emergency savings account. (I won’t say how many months that could cover.) Now that we have that much, I was ok with just investing the extra money from there on. On the other hand, she wanted to get to $20K in the savings account just to make her feel better. As FrugalDad said, it will make everyone feel better if you just go for the larger of the two numbers — so now we are working towards that goal.

    By the way, if you are laid off for a year or longer, you may want to look into another line of work or in another area or just take some training to improve your skill set. Having been laid off several times myself, I can say it shouldn’t take over a year to find a job in almost any area. If it does take a while, try lowering the bar a bit, take a lower-paying job and use the emergency fund to stretch the paycheck. That way, the saved money will go further and you can still feel productive in the meantime. (Just don’t tell your temporary boss that you’re looking for another job while you are working.)

  6. My husband and I were just discussing our emergency fund this past weekend. Since we are self-employed we are really thinking that we need to increase the # of months we can cover. We need to consider covering our home expenses as well as our business expenses. The economy hasn’t hurt our business yet, but we don’t want to be naive to think that it couldn’t happen. We have about 2 months to cover both home and biz, which is obviously not enough. We are re-thinking our financial plans this year to increase this fund to cover 4-6 months.

  7. There is always a balance between saving and paying off (very low interest) debt. Given that we’re both self employeed we’ve decided to work more on the saving side this year. We have about 4 months saved and our goal is to be at 6 months the end of this year.

  8. Mr. and I have $6,000, which is enough to cover 3 mortgage payments. Mr. works for the federal government with great pay and benefits, in a position that’s unlikely to go away no matter which party is in power, so we’re not worried about a layoff, just medical emergencies (and again, great benefits.)

    Later on we’ll sock away more in the emergency fund, but right now we’re happy where we are because we have a housemate (extra $500 a month) and although I work from home, I can always pick up a part-time job for another $500 (I’m not proud, if I need to flip burgers, I’ll do it)

  9. We have two emergency funds – a big one and a little one. The “little emergency” fund is for irregular expenses that aren’t really emergencies, like yearly insurance premiums, replacement appliances, car maintenance/repairs etc. The “big” emergency fund is reserved for true emergencies – job loss, injury, disability, etc.

    The target for the “big” EF is $20k (currently at ~$13k), and the “little” EF is targeted for $2k (currently at ~$1k).

    Background on our situation: two-income household, both jobs extremely stable (government and health care), and we have no debt except our mortgage (which will be paid off in full by the time we turn 40).

  10. My wife and I lived check to check while we were aggesively paying off our debt. I hated doing it, but I also hated paying interest on credit cards when I had money in the bank. Had anything bad happened and we would have been royally screwed!

    Now we aggresively save. My wife was recently laid off and is expecting in March so the small fund we have saved plus her severence is allowing her to not work for the first year.

    I like to have 2 months expenses handy just in case of extreme emergency, we’re never going back to using the cards.

  11. I have a $2000 emergency fund. While I would like to have more, that seems to be what we’ll settle on while wife stays at home. I’m pursuing some part time work that could help grow it larger in the near future.

  12. I am a recent college grad so my emergency fund right now is also acting as my vacation fund. Hopefully for me I can use it for the ladder. It is about a month and a half worth saved up and am comfortable with it for now. Problem is after a vacation, the fund will be depleted and I will have to start over again. I would love to have a separate account, but clearly need to earn more income.

  13. If you’re choosing between food and deodorant, you need to cut your expenses or boost your income – you’re in exactly the situation where an emergency fund is the buffer between you and living on the streets.

    If you get a second job, it’s not that difficult to set aside $1000 or so as a starter emergency fund.

  14. I currently have about 13,000. I would like 18,000 to 20,000. Getting there. I want 6 months of expenses.

  15. Currently we have about $13,000, so we’re on our way. We’d like to have closer to $20-24,000.

    Once we reach that point we’ll start investing 15% and then paying down our mortgage.

    Emergency fund talk him home today. My wife is facing a layoff possibility in the next week, and they laid off 10 people at my company today. I hope those people had planned ahead.

  16. Approaching retirement and completely debt free, so my ’emergency fund’ is just an undedicated part of the whole savings/investment pie. In quick moneymarket cash funds, I keep about $3000 – depending on what dividends have popped into it while I wasn’t looking 🙂

    Prior to being debt free, I always felt that I needed 6 months of living expenses in the emergency fund. That’s just where I slept well. And for me, that was about $5000. Now, my expenses are much less, and that figure would be under $2500 for 6 months at my bare bones budget to cover utilities and car/house insurance and basic medical.

  17. After one medical emergency overseas wiped out our emergency fund in September we scrimped and saved. We paid for two more flights to Malaysia because my MIL became ill again. Four days after my husband returned my MIL passed away and we had another flight to pay for plus funeral costs. Funds low at the moment but the kids still managed a good Christmas and birthdays. Have picked up a lot of hints from the frugal community to help keep costs down while socking away the money

  18. $2500 for 6 months of expenses? You say that covers “utilities and car/house insurance and basic medical” but does it also cover food?

  19. Yes it covers food at $80/month, which is what I spend now. I also have a garden and about a year’s worth of food stored so food would be the least of my problems.

    My bare bones budget is $375/month. I have no debt. It’s a good feeling 🙂

    It does not cover cable TV (which I don’t have anyway) nor internet, which I can use at the library.

  20. @Marci: That’s truly amazing! Our food expenses are typically $600/month, with two adults and two kids. Is $80 just for yourself, or does that include other family members?

  21. That’s just for me and visiting grandkids. Sometimes the boyfriend, but he reciprocates, so I figure that evens out.

    I have a good little garden, on my 50×100 city lot, and I fish, clam, and hunt. Cooking is mostly all from scratch – and lots of soups and stews.

  22. At age 45 this is really the first time in my life that I’ve gotten serious about building an emergency fund (AND being frugal, cash-only based, etc.). January 1 we started a SERIOUS budget plan and number one goal is to build a solid emergency fund. Have $40-something dollars so far (she says sheepishly), but expect to make big deposits in Feb – looking to build that to about $24k by December 2009.

  23. Wow… I am amazed at the number of people with emergency funds. We are starting over after losing pretty much everything we had. After my husband had 6 consecutive companies fold up and file for bankruptcy in a 2 year period, we had used up everything and been forced to live off credit cards while we hoped things would turn around. He even looked for employment outstate with no luck. I remember my emergency yard sales that helped make mortgage payments and string things along a little longer. Now we have a rental farm and because of where we had to move in order for my husband to stay employed, we still barely make ends meet. Upstate NY is not a reasonably priced area to live, but he has a job and that is pretty exciting. I have gone back for my masters and hope to get a teaching job in the next couple years, but right now I make minimum wage and work less than 30 hrs a week. We have maxed our income (until some major milestone is met, and have cut everything not nailed down..yet we still struggle to make end barely meet, let alone have extra for an emergency fund. How do you folks do it???

  24. @Sheila: There are only two ways to go beyond the paycheque-to-paycheque world: decrease your expenses or increase your income.

    If your family income is $50k, but you can live a lifestyle that only requires $30k, you’ll be able to save $20k each and every year. If you think it’s impossible to live on $30k, it’s not – plenty of people earn that much and get along just fine.

    No matter how much you earn, it’ll always feel like you need to earn just a little bit more to “feel” wealthy. The reality is that the path to wealth is to increase the spread between what you earn and what you spend. If you do so, saving up an emergency fund is pretty easy to do.

  25. I have a rather small emergency fund, $1,000, but my monthly expenses are low & I am aggressively paying down debt (while saving for other things). When the debt is gone, I will be able to put a nice chunk of my salary into the emergency fund and different savings accounts & CD’s.

  26. Any money I was not expecting (tax refunds, rebates, birthday gifts, etc) goes into my emergency fund. I only have $2,000 right now, but I am a single mom who only makes about $20,000 a year (including child support.) So although not easy, it can be done.

    But my biggest money tip is to give away 10% off the top. The money is all God’s anyway, He only asks for 10% back. Although it may seem difficult, this is the best decision I have ever made in my life and I think it is why God allows me to pay all bills, have a little saved, and be with my boys most of the time. If 10% seems extreme, start with 1%. I am sure you will be blessed by it.

    -Becky in NJ

  27. The emergency fund question always makes me a little crazy because we are struggling to make ends meet, and even having to use the credit cards as my husband’s business is less than a year old. It is starting to grow, there have been a lot of calls lately, maybe due to New Year’s resolutions? At any rate, it looks like this month he’ll meet the minimum required for us to meet our budget, which leaves nothing to go to savings or extra debt repayment. But any business is better than none! I would love to see at least three months of expenses in the bank as our emergency fund – but this would come after the credit card debt is paid off.

  28. I tend to worry way too much (or, in this economy, maybe not enough!), so I would like to have 50% of my annual salary in emergency savings (I’m at, um, not quite 5%). This would cover well over six months (I think) simply because some expenses of work would not be there–and since my target is my pre-tax salary, it would be closer to nine months. (Naturally, ideally I’d like to have enough in savings to live of interest, but that wouldn’t be so much an emergency fund, would it?)

  29. My friends encountered the danger of those canned answers about savings: they’ve just started seeing a financial planner who said to them “You need $20K in an emergency fund. Period.” So they completely backed away from even trying to save!

    I don’t think we should even think in terms of a dollar amount, or a time period. It should be based on how able you are to cope with an emergency.

    For us, a DINK couple in Canada (ie public health care) in a rented house – something drastic would have to happen to qualify as a financial emergency. So our savings is really more of a “Pain-in-the-Neck” fund, and therefore doesn’t have to be that big. If we had kids and a mortgage and both worked in vulnerable jobs – we’d need way more savings.

  30. @Krista: While it’s true that the size of your emergency fund can vary quite a bit depending on your life situation, the typical “3-6 months of expenses” gives people a good yardstick to go by.

    Since you have no dependants and aren’t likely to face a large medical bill, 3 months’ worth of expenses is probably all you should need in an emergency fund, which (in dollar value terms) probably would be around $3-4k, depending on how much you’re paying in rent.

  31. We are working on a 12 month emergency fund. We have about 8 months saved up. This is in addition to a high yield savings account, currently about 6K, that we use for things like annual payments (car ins, life ins) and other expected expenses, like holiday travel, gift giving, hedging utilities, etc.
    While we do have debt that we could be paying off more quickly (mortgage, one almost done car payment, and two student loans [one student loan has a high balance but is at a quarter of a percent!!]), my husband works for a bank that just got bought out (with bailout funds…grrr) and there is certainly a chance that he will be laid off. He is supposed to get 12 months severance, but I’m not holding my breath. He works in financial services, so it could take him quite a while to find a new job. We have two young kids. So, our emergency fund is going to be 12 months so we can sleep at night. Once we get there, assuming hubby stays employed, we’ll start aggressively paying off debt.

  32. I absolutely agree that $1000 is not enough for those unexpected expenses and repairs that can pop up. I strive to keep 3 months worth of expenses in my savings account.

  33. I think Dave Ramsey’s initial plan of $1000 is to get people (like me!) into the saving mindset and get things rolling. My husband and I started our second Financial Peace University classes about a year ago. This time, we managed to save $1000 several times throughout the year that got eaten up pretty quickly (usually by car repairs). By the end of the year, we had spent $3483 from the EF and it was down to 0. Again. While $1000 may not be enough, it is a cushion in case of life happening and has been a huge blessing to us. For those people like us who have never managed to save anything before, it is a realistic goal that we can meet and the peace it brings. Well, it’s amazing.

  34. Currently at $1500, will be $2500 within the next two months because the economy is making me somewhat nervous. I live off of what I made the month before so I’ve always got an extra month’s income as well. Between the two, that should be enough for bare bones expenses for 3-4 months.

    My current end goal for my eFund is $15k, but I may have to revise that upwards as my standard of living increases.

  35. I am wondering if any of you have any thoughts about health insurance while unemployed? COBRA insurance is pretty expensive – how do we estimate that into our 6-mth Efund? Thanks!

  36. @Nan: Continuing benefits under COBRA is very expensive–think paying both sides of your insurance premium on your own (what you currently pay plus what your employer contributes, which is usually more). Still, this might be a good alternative to finding an individual policy in a pinch. I would find out how much COBRA would cost in your current situation and include that in my 6-month emergency fund.

  37. @Nan, yep, what FrugalDad said. CORBA will cost what you and your employer pay combined — except that only you will be paying it after your employment has ended. I believe that CORBA can only be extended up to 90 days though. It is usually only enough time to find another job or enough time to get a personal policy and get through the 30-45 day waiting period before coverage begins. Usually if you are laid off, the benefits paid for by the company are extended until the next time the premiums are due, which is the beginning of the next month. So if you lose your job near the beginning of the month, you can stretch coverage out to almost 4 months.
    You can find Blue Cross/Blue Shield for personal health/Rx coverage for reasonable rates if it does come down to that.

  38. @Nan: Good points, DavidK…thanks. Nan, check out the limits on COBRA–I think it was recently extended to 18 months of coverage, depending on scenario. If you are a member of Sams Club or Costco check out their group benefits plans. More reasonable than COBRA, typically.

  39. My understanding also is that COBRA is 18 months. But a less expensive policy would be getting major medical coverage only from somewhere else… with a high deductible of $2000 or so, the price gets much more reasonable. Plan on covering your own medical and dental, and just get the insurance for the major hospital stuff, and you can find it for about $150/month or less…. At least that was what I found out when I was trying to move back home 2 years ago without a job lined up at the time. Luckily, I found the job also with health ins. so didn’t have to buy the major medical policy.

  40. correction on above – Plan on covering your own EYES and dental … not medical and dental… sorry – too late to think!