Size Matters For Emergency Funds

A solid emergency fund is the foundation of any solid financial plan.  Having a little tucked away for rainy days puts some distance between you and the ledge of a financial cliff that could give way at any moment–usually from broken appliances, car repairs or major medical issues.  Most financial planners advise people to have about 3-6 months worth of expenses saved in money designated for emergencies only.  However, over the years I’ve found this 3-6 month rule to be too arbitrary, because there are a variety of factors to consider when deciding how large to grow your own emergency fund.

Emergency Savings:  Just Starting Out

Dave Ramsey’s plan calls this first phase of savings the “baby emergency fund.” It is represented by $1,000 in a savings account.  This first $1,000 in savings is the first of seven financial baby steps recommended by Ramsey, but over the years of putting his plan in action we’ve found this amount to be too low.  $3,000 is actually a better amount for our family, and we arrived at this number rather unscientifically by floating an amount that made both me and my wife comfortable.  Not unlike most couples, our emergency savings balance represents a “middle ground” that we both compromised to reach because of our differing degrees of risk we were willing to take on.  We have our emergency fund stashed away in an ING Direct high yield online savings account.

Men Are From Mars

My wife is more conservative than I am when it comes to the amount of risk she is willing to accept.  I am on the opposite end of the scale, opting to take on more risk for the opportunity for a larger reward.  Our differences are not unlike most married couples, where one spouse helps balance out the personality of the other.  I agreed with her that the $1,000 baby emergency fund seemed a little low, and thought we should double it.  She thought $5,000 sounded good to her.  We met in the middle (almost) and settled on $3,000.

How Large Should Your Emergency Fund Be?

I mentioned in the opening that there was no magic formula for calculating how much should be in your initial emergency fund.  But if I were attempting to devise such a formula it would probably look something like this:

  • $500 per Spouse
  • $500 per Child
  • $1,000 Extra for Single-Income Families

Following this formula we arrived at the $3,000 amount for our family.  If my wife worked outside the home, we could probably live with a $2,000 beginner emergency fund, because if I became unemployed we would still have her income to fall back on.

A Fully-Funded Emergency Fund

Once you are completely debt free I recommend saving a fully-funded emergency fund which represents 6-12 months of living expenses.  For most families this would probably look like $10,000-$15,000.  Remember, in a real emergency this amount would only be used to pay for basic expenses.  Mortgages, car payments, food and basic utilities should be included in this calculation.  Your Netflix membership and cable bill could be canceled or put on hold in a pinch.  To the savvy investor $15,000 may sound like an exorbitant amount of cash to keep on the sidelines, but just imagine the peace you would feel knowing you had $15,000, or even $20,000, just sitting there in case of emergency.


  1. The number 1 thing I always focus on when talking about emergency funds is peace of mind. Think of how tense most of us are at our jobs — the prospect of losing it is always there, haunting us. But once you take that feeling away you can do your job more effectively, and if you do lose your job it’s not a big deal. You start looking for a new one and start living off your emergency fund.

  2. I agree that the $1,000 baby emergency fund may be too little, but for many people, that’s the most money they have ever saved, so it’s a good “touch point” for people to wrap their heads around without feling too overwhelming. As to the size of the fully funded emergency fund, we’ve also opted for a middle ground. I was willing to go with three to six months of expenses, my wife wanted to set aside no less than six months of actual income. What we settled on is a little closer to six months of actual income, but this gives my wife the security level that she wants to have, and I’ve found that that is important. It als olets us be a little more automatic and focused with saving for retirement and other financial goals knowing that the emergency fund money is where we need it to be.

  3. –You’re totally right about the $1000 not being enough. That would be gone in a heartbeat. You could handle a couples doctor’s bills with it, but not much more. We got the $1000 right away, and slowly began adding a couple hundred bucks a month.

    –I think couples balance each other in other ways too. No Credit Needed wrote a post a couple months ago about money nerds and free spirits. That’s how my wife and I balance each other.

  4. I settled for $2000 for the baby emergency fund but I like your formula and will try to boost it up a bit more. I think the actual emergency fund is really about how fast you can replace the lost income with the right job. If you can get a comparable job that you like in less than 3 months than the 3-6 month rule is good. But if it could take a year to find a job you want then 12-18 months is better. Of course you would proably be working some kind of job to keep yourslef busy and to bring in some money in the meantime.

  5. After much discussion in our family, and a small windfall, we decided to go ahead and boost ours up to 10K. We have no children, but my husband is in school fulltime, so I am currently the single income-earner for our family. Even if it does seem a little high, I have such a peace of mind knowing that money is there if and when an emergency occurs. And having it in a high-yield savings account is great- even the little amounts of interest we earn can really help.

  6. My wife and I are currently working on our emergency fund. Right now we’ve got just over $3,000 saved, but we’re working on 6 months expenses. Based on our current expenses we’re about halfway to our end goal.

    Great post! An emergency fund is definitely the most important part of a well-thought out financial plan.

  7. You are right on FD! We are following Dave Ramsey’s plan but $1000 didn’t seem like enough for our situation. So we increased on initial ‘baby emergency fund’ to $3000. It gives us some peace of mind knowing the initial safety net is there while we pay down our debts.

    Thank God for Dave Ramsey and for you FD! Your posts always offer motivation to stay on track.

  8. i think the real question to ask is “what is my e-fund for”? The answer has to be reasonable, especially in the initial stages. But that will help determine your individual amount more than a set number of $1000 or $500/person.

  9. Your emergency fund will reflect where you are in your move to be debt free and your age. For me, $1000 covers 3 months of basic essential expenses. But at my age, I no longer have an ’emergency fund’ as it is my one day retirement fund. Somewhere along the way,(after 50) the retirement fund and the emergency fund merged 🙂

    CASH? One thing rarely mentioned is that one should also have a CASH emergency fund…I like to keep $500 in cash stashed where I can grab it and run if needed. What if the electric is out and the ATM’s aren’t working, it’s a weekend, it’s a storm disaster, or you need to drive somewhere very quickly out of town at night for a family emergency? All those situations could require CASH – a cash emergency fund – not just an emergency fund in the bank unaccessible in times of disaster or electric outages (we lose electric a LOT out here on the Oregon coast…)

    So think about a Cash Stash also – somewhere very very safe, obviously, well hidden. While I haven’t had to use mine personally, I have had to dig into it for my grown kids when a middle of the night emergency happened and they had to drive out of town right away and I didn’t want them taking off without cash in their pockets… They’ve learned to keep some cash around now 🙂

  10. I have living expenses of $3,500 per month and only have $5K in an emergency account.

    I want to increase the emergency account to at least $15K. I am also putting $500 pre-tax into a retirement fund.

    Knowing what you do about the current state of the stock market, do you think it’s wise to stop contributing to the retirement fund and divert the $300 per month (post-tax) towards my emergency fund? People keep telling me now is the time NOT to stop contributing to retirement since the current turmoil is allowing me to buy stocks and mutual funds on the cheap.

    But I need to grow the emergency fund as well and the potential of making a killing in my retirement plan is preventing me from deciding between what option to take.

    So retirement or emergency fund?

    • @TJ: If I was in your shoes I would bump that emergency fund up just a little to provide closer to two months of expenses—say, around $7,500. It’s really a personal decision on how much to save. I settled on about three months of expenses after deciding an amount that made me sleep better at night.