Emergency Fund

We never know exactly how our lives are going to go on a daily basis. We can have plans and goals, but life happens and things go wrong. We might have a car accident, a sports injury, storm damage on our home, the list of possibilities is endless.

One thing you can count on in life is having some type of unexpected expense. The only way you can avoid being extremely negatively impacted is by having an emergency fund.

What is an emergency fund used for?

Unforeseen expenses that are necessary.

For example:

• Health related expenses
• Car accident expenses
• Natural disasters
• Lost job
• Unexpected travel
• Legal issues
• Pet emergency
• Home repairs

The list goes on, but basically anything you’re not planning. For example, a roof replacement, unless the damage was the result of a storm, wouldn’t count (to me) because you should be saving for that in your house fund since you already know that roofs don’t last forever. A dead car battery would also not count (to me) because you know it’ll happen eventually so you should be saving for it in your car fund.

How much should I have saved?

Experts give you many different ways to figure out how much you should have or what your goal for your emergency fund should be.

Here are a few ideas:

• $500. Let’s say you live with family and don’t have any real expenses, you could start with this one. Or perhaps you have $0 saved at the moment, you can make this your fist goal.
• $1,000. This one is likely just so you have a small amount set aside for anything you might need. I don’t like this one much because your needs will vary wildly from anyone else’s so I think your E.F. should be personalized to you. I do, however, think this is a starting point to aim for if your needs are greater than this but you’re not there yet.
• The amount of your highest deductible. Whether it’s your car deductible, your health insurance deductible, or your home insurance deductible you should have saved at least as much as your highest deductible is first. The idea being that if a huge event impacts you, you’ll be able to cover what the insurance will not and therefore be in a decent place financially. This one is also a starting point, not necessarily the final amount you’ll want to have.
• 1 month of basic living expenses. To calculate this, add only your necessary expenses for the month: housing, food, insurance, phone, etc. I wouldn’t include the fun stuff because the purpose of this fund is to hold you over in the event of a job loss. So if you were to lose your job, you would cancel any expenses that you don’t need in order to live: gym, Netflix, Spotify, other random subscriptions you pay for.
• 3 months of basic living expenses. Same as the prior one, but multiplied by 3.
• 6 months of basic living expenses. Same as the one-month, but multiplied by 6.
• 12 months of basic living expenses. Same as the one-month, but multiplied by 12.

How do I figure out what I need?

1. You need to have a clear financial picture. Figure out how much you’re spending every month and what your debt payments are on a monthly basis. Also, figure out what each of your deductibles are.
2. Think about how you want to use your fund. Do you want to be able to fund your life exactly how it is now in the event of a job loss? Or would you be okay with trimming some/all of the fun expenses for that period of time?
3. Calculate how much you will need for a month by adding all of the expenses you want to afford during the unemployed period.
4. Now that you have good numbers to work with you can start deciding what your ultimate goal should be. If a month of expenses is more than your highest deductible, then that is what your goal should be. If your highest deductible is higher than a month of expenses, I would aim for that.
5. Lastly, the ultimate goal should be between 3 and 6 months worth of monthly expenses.

You can decide how many months of expenses you need based on your personal situation. For example, if you don’t have any dependents and you think it would be relatively easy for you to find a job again you could probably save less than a person with dependents who maybe has a highly specialized job that would be difficult to replace.

Accumulating the Amount

Now that you have decided what is write for your lifestyle, break up this goal into smaller milestones that you can work toward.

You can either:

1. Start by figuring out how soon you want to have it and then break it up into however many pay periods are between now and that deadline. This one works well if you have a lot of income you can set aside from each paycheck for this.
2. Look at how much you have available in your budget on a monthly basis so that you can put that amount toward your fund and then calculate how long it will take you to get there based on your contributions.

Since having an emergency fund is very important for your financial life, I would personally prioritize the fund. I don’t mean that you need to rush to fund it all 100% in a month, but I would prioritize getting to the highest deductible as soon as possible because that will protect you in a severe emergency that isn’t job loss related. You can also decide to do side gigs here and there to contribute more until you’ve fully funded it. (That’s what I did.)

My Emergency Fund

Personally, since I don’t have dependents and I know I can easily find a part time job to pay the bills, my emergency fund is on the low end. In the event of an unexpected job loss, I would simply get a part time job to pay for my living expenses so I don’t have to dip into my savings. Unless I really wanted a break, in which case I would trim the fun from my monthly expenses, by doing free fun activities rather than paid ones, and not work.

I also want to go back to where I said your emergency fund is for unexpected expenses only. If you are new to saving, I would definitely count a dead car battery or something of the sort as an emergency and use my emergency funds for that. The only reason I don’t count that as something I would use my emergency fund for now is because I have sinking funds for my car, house, health, etc. Therefore when I think of emergency funds, it’s pretty much just for being unemployed or some disaster. Everything else has a fund for that.

When I first started though, my first goal was $500. Then it was $1,000. Then the goal was one month of expenses. I don’t like the idea of having a lot of cash, so I don’t have a terribly large emergency fund. Particularly because, like I mentioned earlier, in the event of a job loss: I would work part time. I would not use my emergency fund unless I was so mentally drained that I really needed a complete break from working. Also, I do have money in a brokerage account and, if I had to, I’d sell some securities to fund what I need.