Updated on 06.23.07

How Much Emergency Fund Is Too Much Emergency Fund?

Trent Hamm

Yesterday, I mentioned my desire to have a twelve month emergency fund, which resulted in some very interesting discussion. Some of the readers thought it was a good idea – others felt that it was simply too much and that I should invest some of it.

Back in April, one of my favorite bloggers covered the idea of “too much” emergency fund in detail and concluded:

Ideally, your emergency fund should be able to cushion the worst possible scenario (specific to your personal situation) that you can imagine (“end of the world” is not a valid scenario). Add a 20% margin of error to that estimate (roughly) and aim for that emergency amount. The right amount will be something that makes you feel “safe” after considering the worst case scenario. More than that is probably “too much”.

This brings us back to the idea that personal finance is more personal than finance – something I believe in greatly. I think it makes a lot of sense to walk through a worst-case scenario in detail, but to remember that that worst case is something different for each person. So, here’s my worst case scenario and why the idea of a twelve month emergency fund appeals to me:

We have a third child and that child is born with a birth defect, which means we incur medical costs all through his/her life. Shortly after the child is born, I lose my job and on my way home I get really upset and proceed to run my truck into my house.

This is the worst-case scenario I envision that doesn’t involve a death. Is it realistic? Probably not. Does it keep me up at night? Not really. But there are a ton of pieces of this scenario that are possible, and they all result in having to spend significant amounts of extra money.

Outlining that worst-case scenario is one’s living situation. For us, we already (effectively) have a household of four with two children under the age of two who are basically incapable of caring for themselves, and we are thinking of following up with another one (at least). I have the financial means to plan for a worst-case scenario that enables their lives to continue in much the same way as before, with the safety of home, a fairly regular way of life, and parents that love them.

Another big piece of the puzzle is your values. I want to always show them by example that self-reliance and preparation is the best way to live so you can simply roll with any punches that life hands to you.

After running through the numbers on this scenario and others, I concluded that a year’s worth of salary is an appropriate emergency fund. For most people (not having multiple young children and not placing a large emphasis on self-reliance), a smaller emergency fund makes a lot of sense – in fact, I would say that our fund idea is far, far above the norm.

The lesson here? When you define your emergency fund, be sure to look not only at your worst case scenario, but the other pieces of your life that surround it, and consider your own personal values. There is no cut-and-dried formula for how much emergency fund you should have – it’s one of those things that really puts the personal in personal finance.

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  1. Lisa says:

    You have mentioned that you are considering leaving the corporate world to blog full time. In that case 12-18 months emergency funds would not only be reasonable but prudent. Perhaps 6-12 months should be called something else. When starting your own business many books recommend 1 year of operating funds and in this case that would be backup funds for daily living.

  2. Eric says:

    If the window is larger than 6 months is this really an emergency fund anymore or some sort of pseudo-insurance? If so are there any policy’s out there that might fit better without tying up tens of thousands of liquid assets?

  3. Luke says:

    I think when emergency funds are placed in the proper accounts, it isn’t all that bad. Of course it varies from person to person on exactly how much is needed, but if you can work the emergency funds into 5+ percent CD’s and money market/high yield savings accounts, as long as you don’t go over board, it’s not an issue. Think about it, your emergency fund is making 5.15% a year? Not to shabby. A year seems like a stretch to me, because if you are young, one year just seems like a catastrophic event happened.

    If you need $10K in your emergency account, for example, once you have hit that mark, don’t place anymore funds in there and go straight to the market or other venues you feel comfortable with where the money can work harder.

    I built up my emergency fund with my wife and once we hit the mark, when simply went full go into our brokerage account. We didn’t feel the need to increase it any to keep up with raises, we simply placed future monies into the market.

    I think having an excess amount in the emergency fund, as long as you aren’t 58-years old with $198K sitting into your checking account making .1%, you can correct the mistake, move on and learn. There are far worse spots to be in during this life, than to have to much money sitting in the wrong account, when all that is needed to fix it is writing a check or transferring monies to another account.

    I also think when figuring out how many months are needed, you shouldn’t include auxiliary items that you wouldn’t NEED during the time of emergency. When I think of using and drawing down my emergency funds, I don’t think that I would keep netflix subscriptions, buy boxing PPV’s, take a trips etc. etc. The monies placed in the emergency account should cover only what is needed [ie. mortgage, car payments, utilities, gas, food etc.]

  4. Amber Yount says:

    I think honestly, you should save up for as much as it makes you comfortable..Emergency funds are meant to make you money, they’re meant to keep you safe, so everyone else should stop whining about putting it in stocks and funds

  5. I always have a push-pull on the size of emergency funds simply because of the tax inefficiency of making interest income as opposed to dividend/capital gains. Have you back-stopped your emergency fund with a line of credit which you don’t draw down on?

  6. limeade says:

    Nothing really beats the feeling of having a large chunk of change in cash. Whatever makes you feel good is what you should do. Personally I’m aiming for 12 months worth of expenses. After that, the focus is on buying assets that will throw off free cash flow.


  7. UncleOxidant says:

    I agree with Amber Yount: Make your emergency fund as large as you feel comfortable.

    I tend to think that it should be six months of living expenses as opposed to six months of salary. Currently, we figure our living expenses are around $2500/month. So six months @ $2500/month is $15000.

    Some people seem to be saving X months of salary for their emergency fund. That does seem like a lot. In our case we’re saving (including 401K contribs) about 30% of our gross salary so that doesn’t seem to make sense for us as our living expenses are much lower than our take home.

    Also, I suppose there are other ways of saving up the six months living expenses: for example, one could get six months ahead on their mortgage and consider that part of the emergency fund. That way if you lose your job you don’t have to worry about making a mortgage payment for six months _and_ you’re shortening the length of your mortgage by pre-paying.

  8. Mardee says:

    I keep just a few months worth of living expenses in a money-market account, and have the rest in stocks and mutual funds. Since I have 2-3 months in cash, I have time to liquidate the rest that will minimize any loss I might have to take, and can do it gradually as needed. And let’s face it – chances are I won’t ever have to use it, so the rest of the emergency fund in the stocks/MF will continue to grow at a much better rate than I would ever get in the money-market account.

  9. Bill says:

    Whatever lets you sleep at night.

    But with your plans to soon have 3 small children, I thought more of life and disability insurance given your worst case scenario (what if you die or become permanently disabled when the truck hits the house?)

    I’d think minium $500,000, and more likely $1,000,000 in 20+ year term life (coverage split based on the relative income between you and your spouse)

    Disability insurance is a trickier subject – much more expensive, since it has a far higher likelihood of occurring than death at your age, much harder to get (especially own occupation coverage)

  10. BILL says:

    Very well said. The entire purpose of an emergency fund is to deal with risk. For someone in a low risk job (say a teacher with tenure) a smaller ER fund might be OK. If your family has two incomes, again less risk due to diversification.

    Single person with a high risk job (say sales) would need a larger cushion to deal with a complete loss of income.

    Risk is measure by both frequency and severity. Any solution for the risk must factor both and respond to both.

  11. rhbee says:

    Okay, has no one here ever heard of a self-fulfilling prophecy? Prepare for the worst, imagine the worst, what can you think of that would be worse than doing just that? One of the main reasons I personally have never wanted life insurance is just that. Nothing can insure your life. You live and then you die. The worst case scenario then is you haven’t set up a will that identifies the person you trust most to turn off the lifeline. My partner is famous for saying if I worry about everything then I’ll be sure to be right about something. She drives herself crazy. This discussion is doing the same thing to me.

  12. Trent Hamm Trent says:

    Bill, I already have those in place.

    rhbee, do you have children?

  13. rhbee says:

    Three grown and happily on their own, nine grandchildren living hopeful lives, and one great grandchild who apparently is doing well, too. I gave them the best I could while they were under my care and I taught them from the start that I trusted that they could live their lives with confidence. So far, that’s the way it’s worked out.

  14. kaye says:

    You’re right about personal finance being personal. Two years ago our business lost our biggest clients all at the same time. Our income dropped from $160,000 to zero for a year. We had a $70,000 emergency fund. Our partner went to the bank and took out a $70,000 loan for living expenses. We value no debt and our partner doesn’t. Personally, it would keep me up nights to have zero income and a huge loan to payback.

  15. Tim says:

    emergency funds need to be custom tailored, because not everyone’s situations are the same. some will need 6months others 12months. if you are in a highly volatile career field, more is better. if you have ailing family members, more is better. if you have older stuff like cars, water heaters, etc, more is better. it isn’t self fulfilling a prophecy to hedge risks. that is what an emergency fund is doing. emergency funds also creates a buffer so you do not have to do drastic things like cash out retirement accounts, sell off homes, take out loans, or charge credit cards.

    i agree that you can stagger asset maturity dates for emergency funds since you probably will not need everything at once.

    i’m not a fan of counting on borrowing money as a form of emergency fund. the last thing you want to do is go into debt when you have no source of income. that will compound the problem. so despite being able to take out a HELOC, you are still faced with mortgage plus loan with no income. when you do restart income, then you are in a hole again. remember equity in a house doesn’t necessarily appreciate and doesn’t guarantee that you will be able to actually realize the equity in practical terms or quickly do so.

    the same thing with credit cards. i’m not a fan of having a credit card “only for emergencies”. again, cc have high interest rates and going into debt without being able to mitigate the debt is counter productive.

  16. rhbee says:

    I am not necessarily against the idea of an emergency fund. What bothers me is using the motivation of fear to drive your financial or any other situation. Back in the day, there was a film on HBO and then available to schools called Scared Straight. It may well have been this film that set up our current national policy that says that torture is okay if you are doing it for the right reasons. I prefer to think straight. I have an emergency fund because, as Trent and many others have pointed out, it is a good idea.

  17. Tim says:

    rhbee, i don’t think it is fear driving anything at all. you diversify your portfolio to reduce your exposure to economic fluctuations. you take out health, auto, home owner’s/renter’s insurance to mitigate your costs associated with losses. you look both ways before you cross the street. it is simply a prudent way of mitigating your exposure to risk.

  18. Tordr says:

    It all boils down to risk, if you sleep better by having 18 months of emergency fund as opposed to 6 months. Then that is costing you the difference in interest between money in the bank and repaying a loan, but it might be well spent money.

    Also as others have already pointed out, a large emergency fund need be all cash. Some of it can be invested, but one has to look out for correlations. Meaning that for example a stock broker should not place his emergency fund in stocks, as he will probably need the money if he gets fired, but he has a high probably of getting fired if there is a stock marked crash.

    But lastly I want to point out that your reason for 18 moths of emergency fund was that you might be planing to blog full time. Then some part of the emergency fund is maybe not an emergency fund, but rather, money sett aside in case you want to start working for yourself.

  19. UncleOxidant says:

    “so despite being able to take out a HELOC, you are still faced with mortgage plus loan with no income. when you do restart income, then you are in a hole again. remember equity in a house doesn’t necessarily appreciate and doesn’t guarantee that you will be able to actually realize the equity in practical terms or quickly do so.”

    Back during the tech depression I had a long period of unemployment in 2002 and 2003 where I only worked 4 months in those two years. Towards the end of that period, I was getting a bit worried as the bank account kept going lower each month with no income in sight. One day I want over to my credit union and asked about a HELOC. I sat down with one of their loan officers and she started the interview:
    LO: “How much equity do you think you have in your home?”
    ME: “100% We own it mortgage-free. It’s worth at least $175K”
    LO: “What’s your monthly income?”
    ME: “uhh… nothing. I’m currently not working.”
    LO: “Oh, well, we can’t do a HELOC unless you’ve got income. Sorry.”

    So don’t depend on being able to get to your home equity if you’re not working.

  20. Bill says:

    Yes, I vote for what makes you feel secure but within reason. Some 70 year olds in my life had 10 to 15 thousand in each of their credit union accounts. That’s what made them feel secure and no one could convince them to do anything different with it. That’s too much since they have mutual funds, bonds and pension to live off of.

  21. lorax says:

    > So don’t depend on being able to get to your home equity
    > if you’re not working.

    It’s worse than that. Many HELOCs allow the bank to call your loan if there is a change in your credit rating. So, just when you need it most you may not be use your *existing* HELOC!

    Check your agreement. You might be in for a nasty surprise.

  22. Ted Valentine says:

    Finances are like football. Championships are won with great defense (emergency fund) and a good running game (regular savings). Offense (investing) may be sexier, but they don’t always win.

  23. Here’s the thing, I do. I need maybe a 3 month expense EF. Why? Well I usually keep a month of expenses in the bank checking/savings. So that’s a month right there.

    Then along with my 3 month cash EF, I have a lot of short term cash savings for stuff I know I’m buying like car maintenance/replacement. I also have cash for home maintanence which might equal another 2-3 months.

    So do I need more? Not really. Why? Because if it’s a real emergency I’ll be pulling from my invested taxable accounts. So why bother? Because in an emergency are you really going to sit there and say “oh I can only touch my 6 month ef?” Or are you going to use all your assets?

    And leaving that much cash sitting uninvested is stupid. You have a 6 month cash EF, gives you time to liquidate your other assets slowly! So you don’t have the “risk” of investing in “stocks” Mutual funds because you can pull out as needed because you have a 3-6 month cash EF.

    So you aren’t needing cash in a moment’s notice. That’s the point of the EF. Emergencies. Plus if you are saving the extra money you can draw on it as you need.

  24. Frank Kelly says:

    Although the goal might be a good one to reach perhaps you should ask yourself – if things are so good (since I read your blog regularly you’re definitely doing quite well) – why are you so worried?

    Sometimes we spend so much time worrying and planning that we forget to spending time enjoying (mea culpa!).

    So if it makes you feel good to do it then do it – but don’t sacrifice enjoying the 100% guarantee for how wonderful life is now compared to some possibility of a future problem.

    I’m guilty of the same thought patterns and fortunately my wife who is more spontaneous and less of a planner/worrier helps balance things out.


  25. qwerty says:

    Now is more than a year since your blogs about emergency funds. I wonder if some of the commenters still feel the same about your “bad” idea of a 18 months EF ;-)

  26. Zian says:


    Great point. I hope Trent brings up the topic again soon.

  27. Tara Bartee says:

    I am retired and have enough pension and social security to live a simple life, My house payment is 22% of my net and I can save money every month for those expenses that come up predictably but irregularly. I have less than I hoped to have in my retirement accounts (thank you dot.com bubble) but it should be enough. I still keep a 3 month emergency fund because even though I am in no danger of losing my “job”; stuff happens. If I were young and had dependants, an 18 month emergency fund wouldn’t seem unreasonable to me.

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