What’s Your Emergency Fund Magic Number? | brokeGIRLrich
Like so many things regarding your finances, there is no “perfect” emergency fund number and even the number you think is perfect when you start getting serious about your finances can change over the years.
Dave Ramsey, who has tons of really useful financial advice, recommends a thousand dollars.
The funny thing about that number is that is can seem both insurmountably large and ridiculously low – depending on who you are and what’s up in your life.
So how should you pick your emergency fund number?
I. Don’t. Know.
I can tell you how I picked mine though.
The most important thing I can tell you about my number is that it changes. As a matter of fact, I was inspired to write this post today because I started to wonder, with some of the life changes I’m considering, if the number I have right now is high enough.
Let’s start at the beginning though.
Picture it. Sicily. 1922.
Just kidding. Picture it. Mel. 25 Years Old on a Cruise Ship. Out of debt for the first time. Just splurged on an Apple laptop. Magically has some extra money.
And so the $500 emergency fund goal was born.
And $500 seemed like plenty for a while, when I had no debt, no bills and was just floatin’ on the ocean, raking in the dough.
Picture it. Mel. 28 Years Old on a Circus Train. In the middle of paying off all the stupid debt she got into going to grad school. Desperate to get the heck off the train. Now taking her car insurance and health insurance deductible into account.
And the $1,000 emergency fund goal was born.
Picture it. Mel. 30 Years Old in an Apartment in New York City. Aware that her job might kill her. Hating every second. Thinking about how on earth would she pay this rent though, if she did lose her job.
And the $5,000 emergency fund goal was born.
Picture it. Mel. 31 Years Old Living in Hotels and a Van on Out. Thinking that she probably doesn’t want to do this forever. Contemplating how much an emergency fund for someone who might want to live a normal 9-to-5 life might need…
And the $10,000 emergency fund goal was born.
And the $10,000 emergency fund is what I’ve been at since then. If emergencies happen and it drops lower than that, I refill it. Otherwise, I consider it as a goal achieved.
Lately though I’ve been thinking about doubling that number. $10,000 is easily 6-8 months of expenses covered with my current setup – that includes never paying for housing. Heck, on a lockdown budget, it’s more than a year. But if I were to take on paying for an apartment or mortgage, it would only be 4-5 months of living expenses and, maybe it’s because of my freelancing lifestyle, I wonder if that’s enough of a safety cushion.
Also, with my current insurance, if I had to max out what I need to pay out of pocket, I’d only be left with $3,600 in there. And if I had to pay for those medical expense because of a car accident that totaled my car, I’d be down to $1,100 to make it through the rest of the year – or until I was well enough to work again.
The reason I point out all these thoughts though, is because the most important aspect of an emergency fund is the number that makes you feel safe. It makes you feel like you have enough of a net below you, if you need it.
Definitely higher than $3! Ha! We go back and forth on this a lot. We decided to keep one year’s of expenses liquid. I got RIFed twice my first two years of teaching, and after that, I’ve totally adopted an over-the-top approach to savings. But now that we have a baby, I really can’t imagine keeping less on hand. That being said, we actually have considerably more than that in a high-interest savings account because we know due to the age of our house that we’ll need new siding and windows soon-ish. We get windstorms that rip loose some of the siding, but so far, we’ve just been able to pop it back on. I guess for me the true emergency fund size is what you need to sleep at night!
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I definitely agree with that last statement!
I think what scares a lot of people about emergency fund numbers is the “6-8 months expenses” type guideline. What they don’t always get is that’s bare minimum expenses, not how much you spend per month at the moment. But on the other side of things, I believe a lot of people don’t consider things you mentioned like insurance deductibles, home ownership maintenance/replacement, and other expenses like that. It should be the number that makes you feel safe, but probably only if you’re considering all the things that can go wrong.
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LOL – I think that might be part of people’s stress – HAVE we considered all the things that could go wrong? Has anyone? There’s always something lurking that was forgotten. What if I got in that crazy car accident and then a week later I needed a root canal? Done. Screwed. 😛
I think the answer is “it depends”. We’ve never had an “emergency fund” per se. We have assets. We have two incomes. We make more than we spend regularly and we don’t run our checkbook down to the penny every month. If something breaks, we fix it or replace it. If one of us is out of work, we cut back and yes, even go into our cash reserves. How much are those reserves? Right now, about $10,000 but that’s pretty much considered a “car fund”.
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I feel like my number is pretty arbitrary, even though I tried to pick something that made sense… my number is $5,000, although now that I think of it, it should probably be $10k… :-/
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I think while you’re still building it up though, it’s good to set goals along the way – like, $10,000 would be a great final goal, but I’ll sleep a lot better and reconsider how much I’m putting towards this goal once I hit $5,000…
I’ve found myself in a bit of a weird situation recently – needing to move within months of each other (that’s the military for you). Anyways, I’ve kept around $1500 in my emergency fund the last couple of years, and it has been really difficult to maintain while paying off debt.
With a big cross-country move coming up, I’m finding myself coming up short on liquid cash and it’s really nerve-wracking. I’ve made some major debt pay-off the last few months, but what good is that when I’m going to have to use credit cards to pay for this move? I’ve made a commitment to myself that once I’ve settled in from this move – debt pay-off stops to build that E-Fund up to $5000. That would feel much more comfortable than $1000 until I finish paying off the debt.
The military doesn’t cover the moving costs??
My approach to this is less about a number and more about liquidity. Is that a word? Anyway, I’m more concerned with access. I have a bit in the bank. If it gets to high, it goes into an investment account elsewhere that I can access at fairly short notice. I keep my credit limit on my card high. Obviously there are other accounts also, but for me it’s more about being able to come up with $ quickly, from a variety of sources, if required for something far bigger than new tires or whatever. My city is still recovering from a huge quake. If something like that hit again, I want a lot of money at my disposal pretty quickly but keeping it around the house or solely in a bank seems a step too far. Insurance premiums and job loss are small problems. Being able to get the hell out of Dodge is priceless. We’re all shaped by life in different ways, huh?
Absolutely – I can’t say quakes even factor into my emergency thinking.