Determining the Size of Your Emergency Fund

One common question I get from readers relates to the size of their emergency fund. Simply put, how big should it be? How much cash should they have saved in their savings account for those unexpected events life deals you?

Before we even get started, it’s important to note that there are a lot of different theories and ideas about how big an emergency fund should be. The ideas that follow are largely based on my own experience and from the many stories that readers have shared with me over the years.

Also, never, ever have an emergency fund that consists of a credit line. Your credit card is not an emergency fund. A line of credit is given to you by a bank and they have the power to revoke that line of credit or reduce it, often at the very moment when you’re facing an emergency and need that money. Do not rely on it. It is not an emergency fund.

First of all, no matter what your situation, you should strive to have $1,000 in your savings account. If you’re trying to pay down debt, switch to minimum payments for a while and build up this level of cash on hand.

$1,000 covers the vast majority of the emergencies we face in life. It can handle most car repairs. It can handle many medical emergencies, particularly if you’re insured with a deductible of $1,000 or less. It can handle lots of smaller situations that you didn’t quite expect.

If you have high-interest debt, pay that off before building your emergency fund beyond $1,000. I would define high-interest debt as being any debt with an interest rate above 10%. If you are carrying a debt with an interest rate at that level, you need to get rid of that debt. It’s seriously hurting your finances if you let it continue to sit there and accumulate interest.

If you have only low interest debts, I would move that emergency fund up to two months of living expenses for your family. I would consider two months of living expenses to be the base level of money I would keep in your emergency fund.

What exactly is two months of living expenses? Sit down with your checking account and figure out how much you spend in an average month. The best way to do this is to add up all of your spending over the last year – all of it – and divide by twelve. That will give you your average spending for a month. Multiply that by two and you have two months of living expenses.

Of course, if you’re ever in a desperate pinch, you’ll probably cut your spending somewhat and the money will last longer than that. That’s fine, but you never want to assume how your future self spends money.

If you have dependent children, I would add another month of living expenses to your emergency fund for each dependent child. Of the items here, this is the one that I would most describe as personal opinion. Simply put, when you have young children, you need to do what you can to maintain a stable household for them. Children thrive in a stable environment. One big tool for maintaining that stable environment is a very healthy emergency fund.

Don’t invest your emergency fund money into anything that might lose money. Many people are disappointed in the returns that a savings account gives and want to put their money into other investments with a higher potential return. However, investments that offer a better return tend to lose one (or both) of the two key factors that make savings accounts perfect vehicles for emergency funds. Savings accounts don’t have the risk of losing money over time (often at the moment when you need the money) and savings accounts are highly liquid, meaning you can withdraw the money whenever you need it without penalty.

Yes, stocks might outperform a savings account over a long period of time, but on a given day, stocks can very easily be down significantly, which means that you may not have adequate resources during the very emergency when you need it. If you put money into something like CDs, where you’re not at risk of a loss and get a better return, you face the liquidity problem in that you can’t withdraw the money without penalty at the moment you need it. Stick with savings accounts for this purpose.

When you do choose to use your emergency fund, your first priority should be to replenish it once you’re back on your feet. This might mean turning off other savings plans or investing plans for a bit as you replenish, but this needs to be done as quickly as possible to protect yourself against subsequent emergencies.

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30 thoughts on “Determining the Size of Your Emergency Fund

  1. lurker carl says:

    A family of three should survive three months while a family of six survives six months? How bizarre!

    Save up to cover about one year’s worth of basic living expenses. Housing, energy, food, clothes, transportation – not iPhone, cable, carryout, movies, Disneyland.

  2. Adam P says:

    Interesting that you recommend 2 months only (+1 month / child). That’s fairly small relative to the state of the economy and other personal finance bloggers/writers.

    I don’t disagree with you, however. I’m saving for a house downpayment of $100,000; and keeping nearly all of this in ING savings account 1.5% earning accounts. This is functioning as an emergency fund until I buy a house, when I’ll likely reduce it to 2 months or so of living expenses.

    For a person in a stable job/profession who has no children, rents from an attentive landlord, carries decent insurance (auto, renters, disability, provincial health) and walks to work; I’m always hard pressed to come up with a situation that would cause me to use my emergency fund on myself (my family however is another story).

    Once I buy my house/condo however, I can see that changing a lot for repairs or an unexpected tax assessment or condo fee.

  3. sjw says:

    @AdamP – I think it would also depend on whether it is a dual income household or a single. If the emergency fund covers 2 months completely, and it’s a dual income HH, then if one people loses their job then it would cover more than two months, because you still have the other person’s income.

    If, however, you’re running on a single income, or both incomes are iffy, I’d bump up the numbers.

    That being said, I’m got a 6 months emergency fund assuming both income earners not bringing in anything. But that is just because I’m paranoid and have (albeit safely) lived through several layoffs over the past decade.

  4. Lesley says:

    I have a tiered plan for my emerency fund: $2000 as a starting base to cover any car repairs or sudden illness (I don’t have sick days). I’m already there and feel so much more secure. Next I’m planning to split my efforts between starting a retirement fund and continuing to build my emergency fund to two months expenses plus enough to cover my medical deductible. Once I get there I’m going to slow down little–I’ll continue to build it until I have about six months expenses, but once I reach that second threshold, I’ll feel secure enough to start putig some of my savings toward other efforts, like buying a house or making a large purchase, going on vacation, etc. My big goal is to buy a house, and as a single person, I won’t feel comfortable doing that until I have a very healthy emergency fund!

  5. Kacie says:

    I think we want our regular emergency fund at around 6 months of expenses (two kids, one main income, and now a mortgage, no other debts). I hope to have enough money available so if there is a period of unemployment, we won’t lose our house.

    Beyond that, I’d like to have an additional 6 months or so of expenses available in investments or other savings available to tap if things get really bad.

  6. Des says:

    I’m also confused why a larger family should have more months than a smaller family. I think maybe Trent is conflating having more months with having a higher amount. Obviously, a six-person family will have higher expenses than a three-person family – and thus their 6 month e-fund will automatically larger. But why have more months? I understand that children need stability – but are four children any more deserving of stability than an only child? Would an only child be less damaged by a drastic change of lifestyle than one with siblings? I’m not sure that makes sense. One could argue that if you have *any* kids you owe it to them to have 6 months of savings, and you can cheat that down if you are childfree.

  7. Jamboree says:

    I disagree with Des on the point that if you are child-free it is somehow “OK” to have less than a 6-month emergency fund. I am the primary breadwinner and my spouse brings in a small income. If I lose my job, it will likely take me 6 months or more to replace it, and may involve a move. We aim to have 6 months in our emergency fund to cover these and other contingencies. Having that money also gives us wiggle room to take advantage of opportunities, such as one that came up earlier this year but required a cash payment to take advantage of it. I do, however, believe that if we had one or more children, we would have a larger emergency fund – but I do think everyone who can pull it off – single with or without children, married with or without children – should have 6 months of living costs in the their emergency funds. It’s a big goal to hit, but worth pursuing.

  8. LIz says:

    I am taking issue with the “no CDs” aspect of the emergency fund. I have 1 month of living expenses in a savings account (at a bank that I could walk to, although that’s neither here nor there). I then have 1 month of living expenses in laddered CDs that roll for 6 months, giving me a total emergency fund of 7 months of expenses (rounded up to the nearest thousand $, for ease of CD buying). I can handle most emergencies with the savings account, and quite frankly, the penalty I’d pay on cashing out 1 Cd early is not exactly onerous if the emergency were THAT severe (I think it’s the interest that I’ve earned for that 6-month period, although it may be just a month or two worth). And since I have a CD coming due every 30 days, I can probably survive for a week or two if necessary to preserve the interest.
    The CDs are set to automatically renew, so I don’t even have to think about them, and I pretty much pretend they don’t exist, as far as their effect on my daily financial life.

  9. valleycat1 says:

    I know that using monthly expenses is a convenient way to talk about emergency fund amounts, but emergencies other than losing one’s job happen. So although it’s a good starting point/ballpark figure, we’ve looked at likely potential expenses and worst-case outcomes to figure out the amount we feel we need.

    Examples that come to mind: Health care expenses are a major reason people go bankrupt. Catastrophic injuries or disease require expensive treatment and/or an extensive recuperation period – whether a working spouse or the stay-at-home. Deductibles and co-pays can add up in a hurry; if your insurance is tied to your employment, you can be caught in a double bind. Your house could be flooded by a storm or dam break, or damaged in an earthquake, or burn down, requiring extra money up front for expenses not covered by insurance. Your car could be totalled but your insurance doesn’t pay out much of a replacement value toward another one. You or a family member could need legal representation unexpectedly.

  10. Tara C says:

    I have a 3 tiered savings approach: $1000 cash in the house, 1 year’s expenses in a HISA, and then my long-term retirement savings. I would move my tier 2 up to 2 year’s expenses if I was facing a possible job loss, move, or other possibly risky situation. I also took into account what my largest emergency expense has been to date, and made my tier 2 at least that large.

  11. mary w says:

    I think one of the reasons (not stated by Trent in this post) for having a larger EF if you have children is that more people equals higher likely hood of multiple “emergencies”. For example, a larger family is more likely than a single person to have a medical “emergency”, major car repair and unexpected school expenses in the same month.

    The “one month per person” has been discussed by Trent in previous posts. Then is the whole issue of what constitutes an emergency, but I’m not going there.

  12. Rebecca says:

    Just my two cents on this issue – I am striving for an emergency fund of at least $4K. I had a $2K emergency fund early this year, and felt that it would be enough, until the transmission went out of my only vehicle and between the car rental and repairs it cost $3K. I live in a rural area, 46 mile round trip to work, and no public transportation.

    It’s taken months to recover, as I don’t make a great deal of money, but if everything goes right, I should have at least $3K back in the fund by the end of the year, and hopefully $4K by late Spring. I still have about $10K in debt, but I will feel much better when I have a bigger cushion to fall back on.

  13. Adam P says:

    To Valleycat: I want to see a PF blogger who advocates getting proper insurance coverage in lieu of a huge emergency fund, in which case the emergency fund should just be for job loss and should be based on how long it would take you to find a similar job to the one you have now. And that also means paying for insurance that has co-pays that are affordable.

    Major medical need? Insurance. Car totaled? Insurance. House burns down/earthquake? Insurance. Disabled from accident? Insurance.

    An emergency fund is unlikely to be big enough to cover these sort of things in any case!

  14. bogart says:

    @AdamP, I don’t know, I just replaced my aging car; had it been totaled (it wasn’t; it reached a point where I decided against an expensive but mundanely mechanical repair), my insurance probably would have paid me $1K for it (heck, what would *you* pay for a 200K 1998 Ford?). Last year I broke my shoulder and though I have top-of-the-line health insurance through my employer, ostensibly with a $2K out-of-pocket annual limit, my out-of-pocket medical expenses were closer to $5K (it’s astounding what doesn’t count toward the limit — drugs, co-pays, which are $45 per specialist visit including physical therapy, just to name a couple) and I couldn’t drive for 3 months. I’m lucky; my husband’s out of the paid workforce (by choice) and could drive me to and from work and manage all our preschooler’s care (and I work a desk job so I missed only perhaps 2 weeks of work, that covered by PTO), but I can easily imagine a scenario where, FMLA protections notwithstanding, I’d have lost 3 months income and needed to hire paid help around the house.

    “Good” (at least by US standards) insurance and the need for a hearty emergency fund are far from mutually exclusive.

  15. Holly says:

    One item NO one has mentioned is the need for health insurance if there is a job loss. That icreases the amount of money WAAAY over and above actual basic living expenses.

    COBRA is VERY expensive. I know. Lost my job in Aug 2010. My cost of SINGLE person COBRA was $450 per month. Famikly coverage is 2-3x that.

  16. An emergency fund should be established at the same time you’re paying off your debt. Otherwise, as you’re paying off your debt, you’ll need new tires for the car, and if you don’t have an emergency fund, then you have to fund the tires by going back into debt.

    Your emergency fund should be equal to the number of months’ expenses it would take you to find a job should you lose your current one.

  17. Riki says:

    Adam P — you’re in Canada right? Very different system up here and I feel lucky that we have it.

    Let’s consider bogart’s broken shoulder:
    - disability insurance for time off (both through my employer and/or through Service Canada); covers not all but a good percentage of my lost income if I did have to take 3 months off.
    - Provincial Health covers the cost of treatment (surgery, visits with specialists, x-rays, whatever necessary) with no deductibles to meet. Drugs are 90% covered by my personal health insurance. I’m not sure about physiotherapy but I’m guessing there would be a small cost per visit.

    Last fall my boyfriend had a kidney stone that required 6 prescriptions, three in-hospital treatments before it was finally pulverized, and it kept him out of work for 2 or 3 days per week over 2 months. Our total cost out-of-pocket was about $25. Between provincial health care, our own good health insurance, and paid sick days we didn’t have to worry about what his health issue was costing us.

    Now that’s not to say an emergency fund isn’t necessary in Canada. I’m comfortable with 4 to 6 months of living expenses in the bank. But we are lucky in that we don’t have to worry about the cost of health care in the same way.

  18. Adam P says:

    Riki – you’re right. It’s quite different when our medical coverage in place and we don’t really need to budget for it between provincial coverage and most people have top up insurance from their employers for drug/physio etc. I’m going to have to do some digging after my house purchase to see what emergency fund amounts should cover for Canadians who are well insured. Sadly I suspect a lot of it will be just copy/pasted from US pf gurus, and as you’ve pointed out, it’s not apples to apples comparison.

    @Bogart – I disagree on the car part. New tires and a new car to replace an old junk heap? That’s NOT an “emergency” that’s a new car fund expense or car maintenance expense for the tires. An emergency fund is meant to cover the deductible on your auto insurance policy if you’re in a major accident. Not the new car itself if your old car is on its last legs and finally breaks down!!

  19. Riki says:

    Adam –

    My boyfriend and I bought our first house in May and we are definitely still getting a sense of our new budget. I paid off both my student loan and my car loan at the same time so I have an entirely new financial picture that I’m really just beginning to sort out. These are my thoughts for our emergency fund:

    - Deductible on our house insurance is $1000, so obviously that needs to be set aside for any time that we might need to make a claim.
    - 6 months worth of mortgage payments (which include property taxes)
    - 6 months worth of other bills (car insurance, electricity, oil, internet)
    - 6 months worth of groceries + incidentals
    - health insurance: we currently have separate plans through our individual employers so if one of us were to lose our job, we could add that spouse to the remaining plan
    - RRSP/TFSA contributions: could be reduced or stopped depending on the situation.

    The only thing I’m not sure about is “other expenses” — car repairs, home repairs, etc. I’ll probably need to settle on an amount but I’m not sure yet. I’m lucky that my brother is a mechanic, so in my individual situation, car repairs aren’t really a big concern. $500 should be lots for me because generally he charges me his cost for parts + a Tim’s sandwich. For the house, I really have no idea! Maybe 2% of the home’s value?

  20. Golfing Girl says:

    We currently have about 5 months of living expenses (given current lifestyle with no cutbacks factored in) in very liquid savings accounts. However, we have our third child on the way. I’d like opinions on whether I should count our Roth contributions as a source of emergency funds. We’ve contributed $38K (plus they’ve earned a lot more). We also have 401K plans with over $200K in them so the Roths are not our only source of retirement savings. We’re 35 and 37. Any thoughts? The reason I ask is that we’re thinking of using about 2/3 of our liquid savings to pay cash for a newer vehicle when our 16 year old SUV finally dies. We really don’t want a car payment! We have no debt other than our mortgage that has 9 years left on it.

  21. Dot says:

    #14 Bogart
    You are absolutely correct about the “out of pocket max”. We have excellent Insurance with a $150.00 deductible and 2k out of pocket max.
    When my husband was diagnosed with cancer and underwent multiple surgeries and 1 year worth of chemo, like you said.. after everything that was not “covered” under the out of pocket max we paid approximately $10,000 out of pocket each year. The biggest surprise was the $45 copay specialist visit. His chemo was done in the doctors office 3x a week for 52 weeks. Each day we walked into the office we were charged a $45 copay.. for a total of $7020.00 that did not count towards the out of pocket max.

  22. jim says:

    I too don’t really get why you want an amount of extra months equal to the # of kids.

  23. kristine says:

    Also, sometimes insurance does not cover what you thought it would- so read carefully. And insurance compainies can be known to act in their own interest. After Katrinsa, Allstate came under fire for attributing obvious wind damage to the “flood”. This was to avoid paying people who had adequate wind/storm damage insurance, but not flood insurance. It mostly affected those who were too poor to hire legal help for an appeal.

  24. Geoff Hart says:

    One thing to remember about emergency funds: they’re an investment like any other. If you’re lucky and you never have to spend the money, then don’t consider the money to be wasted: it’ll sit there happily growing for the rest of your life, and will become available as part of your retirement funds. Because the money must be rapidly available in an emergency, you should choose investment forms that are highly liquid. Something like a CD (a GIC in Canada) may be an alternative if your bank will let you redeem it in a hurry; most won’t if it’s got a fixed term.

  25. bogart says:

    @Dot I’m so sorry to hear about your husband’s cancer (and the associated financial stresses — it’s mind-boggling, isn’t it?).

    @AdamP yes, fair enough, on the car and I didn’t really see that as an emergency, either. But I can see where someone in a more tenuous situation would be driving a car that was functioning and hoping to keep it going a good while longer and then having it totaled in an accident and being out of pocket a noticeable sum of money to replace it with something similarly functional. And given the “it never rains but it pours” aspect of mini- (and maxi-) emergencies, seeing a need for an (unplanned) car replacement as among the things an EF might cover doesn’t strike me as nuts.

  26. Kathy F says:

    Some emergencies my relatives have been involved in where they needed extra money:

    If you live in hurricane or flood area, you may have to evacuate to someplace else and then pay for hotels and meal expenses on the road that you were not anticipating. My mother has had to do this several times. During Katrina, after a few weeks in a motel in Mississippi, she then fly to stay at my brother’s house in New Mexico. Plane fare that was not anticpated. Natural disaster emergencies happen all over the US and no one is immune. Think wildires, tornadoes, floods, earthquakes, snow and ice storms, power outages. All this stuff happens all the time.

    One relative had a big flood in his house due to a plumbing problem. Yes his home insurance covered the damage, but usually he had to pay upfront for materials and labor to get things fixed (new flooring, carpet, drywall) and then seek reimbursement from the insurance company. He had very little savings so coming up with the cash for that was tough.

  27. Jonathan says:

    While I can’t speak for Trent, I do see one reason that a family with kids might need am emergency fund to cover a longer period of time than a family without kids. Flexibility.

    I live in a single income household with no kids. If I were to lose my job my wife and I could both start seeking whatever work was available to hold us over until I could find another job in my field. While this approach probably would not generate income equal to my current income it would be enough to cover minimal expenses until I found a new higher paying job. If we had kids, however, this would be much more difficult. In that situation my wife might not be able to get a job, or might only get to work part time, depending on schedules etc. For that reason, I would want an emergency fund that covered a greater span of time than we have now.

  28. Tom says:

    It’s not a bad idea to have a bigger emergency fund when you have more dependents. The idea is that an unexpected event is more likely to occur with an increase in headcount. It’s a little bit like buying multiple lottery tickets – each ticket in and of itself has the same chance to pay out, but the more you have in play, the more variance is on your side.
    (Although good point by the commenter who pointed out a 6 person family likely has a bigger monthly budget, therefore more total in an e-fund, than a 2 or 3 person family does.)

  29. Meg says:

    I agree with Adam P – If your income is high enough (and/or your fixed costs are low enough relative to your income), your “emergencies” should be almost non-existant. Smaller health and car maintenance issues should just be able to come out of cash flow, and bigger losses should be covered by insurance. At that point your emergency fund is really just there in case of a layoff or other income disruption.

  30. jim says:

    Having 4 kids instead of 1 does not increase the likelihood of a hurricane, flood, or other natural disaster. Having multiple kids does not increase the likelihood of being laid off from your job. Having more kids *might* marginally increase the chances of needing car repairs or home repairs since more people cause more wear and tear on the car and home, but thats debatable too and a fairly week argument I think.

    Having multiple people does definitely increase your risk of higher medical bills.

    I’m sure there are some other misc. emergencies that could be impacted by family size. But most major emergencies are not really going to happen more to larger families.

    As far as I can see the risks of emergencies aren’t really much higher with more people with the notable exception of possible medical costs.

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