The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.
Rule #13: Keep three months’ worth of living expenses in a bank savings account or a money-market fund for emergencies. If you have kids or rely on one income, make it six months’.
This is an appropriate rule #13, as it covers a scary situation that most of us don’t want to think about: emergencies. What will happen if you lose your job? What will happen if the transmission dies in your car? What will happen if you get spinal meningitis? These seem like unlikely things, but eventually something disastrous will happen and you need to be prepared.
This rule is a solid one, but it doesn’t cover every situation. For example, larger households should have more than six months of living expenses in the bank, while single people can get by with as little as two months. Why is this? A household includes people that are entrusted with the responsibility of keeping a child (or children) safe and secure, and the more people in the household there are, the greater the likelihood that an unexpected event could happen.
In short, if you have a large family, you want to be sure that even if two or three bad things happen at once with different family members, you’re fine. That’s why it makes sense to have a certain amount in an emergency fund for each family member, so that your emergencies won’t affed them and vice-versa.
How much is appropriate for each person? Three months is nice, but it is not quite necessary to have a year’s worth of living expenses sitting around for a couple with two kids, plus three is a little bit high for a single person, anyway (unless they like the security blanket). Two months of living expenses per household member is a much better balance of security and reality. So, let’s rewrite that rule.
Rewritten Rule #13: Keep two months’ worth of living expenses in a bank savings account or a money market account for each person in your household. So, if four people live in your household, have eight months’ worth of living expenses.