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Given the state of the world, I thought now might be an interesting time to take a look at how one calculates an emergency fund. We've talked about where to keep your emergency fund a number of times over the years (and it's the first step in our general “roadmap” for personal finance), but I don't think we've ever discussed HOW to calculate your e-fund.
So let's discuss: Which bills and expenses do you include in calculating your emergency fund? How many months of expenses are you trying to save, and how many months do you actually have? If you needed to draw on your emergency fund for an extended period, do you have ideas about how to reduce certain bills?
I'll acknowledge at the start that deciding how to “calculate” your emergency fund is an exercise in privilege — for many people, just saving ANY amount between living expenses/income can be difficult. (I've read that only 41% of Americans would be able to cover a $1,000 emergency with savings.)
But — beyond freaking yourself out (deep breaths, everyone!) — knowing how to calculate your emergency fund can be important if you're trying to decide how much to “keep in cash” versus investments or spend for large purchases like a down payment on your home.
(In other words, if you've saved $50,000 total and want to buy a house, not all of that can be used for a down payment — you need to calculate how much to keep for an emergency fund.)
How long should an ideal emergency fund cover you?
I've always read that an emergency fund should be between 3–9 months' worth of living expenses, and I've always interpreted that as “money to live on if you have no income.” (My memory of the 2009 recession is that many BigLaw friends were out of permanent work for 6–12 months, and many took much lower-paying jobs when they finally did get work. This page from the US Bureau of Labor Statistics has a bit more detailed info.)
Now, as I type all this out, I realize that there's another fun reason for emergency funds — unexpected disasters — that we'll get into more below. But keep that in mind as we discuss calculating your emergency fund.
How to Calculate Your E-Fund
Here's a list of categories to use to calculate your emergency fund:
- Mortgage/rent payment
- Health insurance premium
- Utilities and other regular home expenses (e.g., condo fees)
- Major bills you can't get around (for example, we amortize big expenses like our insurance bills)
- Spending is tricky — for us, I would base this heavily off the average for the last 6–12 months of grocery spending and try to add a little bit more each month for other “living life” expenses.
- Childcare if needed (if you're still paying it at this point in time). This is also tricky, even in non-pandemic times, because if you're in a place where you need your emergency fund, it may be because one parent has lost a job — so there might be some temptation to say, “Great, why pay for daycare now that Parent is home!” I would argue that childcare costs, at least to some extent, should be in the budget for as long as possible to allow that parent to look for work, network, etc.
We don't factor in my husband's 401K because those amounts are automatically deducted from his paychecks; they would probably be the last to go (unless of course he were to be laid off, in which case they would stop entirely). I would probably stretch to continue our monthly 529 deductions as long as possible, at least to some extent, particularly in a bear market.
My own retirement accounts are a bit wonky because I only make one deposit a year, and the amount varies. (Right now, for every dollar I earn, I take X% and put it in an online savings account for my retirement, and put Y% in a second online savings account for taxes.
So I would probably still take out X% and Y%, but as time went on I might have a hard discussion with my accountant about which tax bracket we'd actually be in.) I have a separate emergency fund for the blog, so I haven't included any blog-related expenses in my emergency fund amount.
This is all… a lot of money, to be honest! And I realize it doesn't leave a lot of wiggle room for “unexpected disasters,” which still might happen at a time when there is no income coming in. I'd be curious to hear how you guys attempt to calculate that ahead of time (or if you just really hope you don't need an emergency root canal or something while you don't have an income!).
As noted above, this primarily matters if you're trying to decide how much money to keep in cash versus other investments — so if those other investments are even slightly liquid (such as, say, after-tax investments in the stock market), maybe that is the “unexpected disaster” fund.
A Few Ideas on Reducing/Cutting Costs
In addition to the notes on retirement savings and 529 savings above, places we could cut:
- We pay extra principal on our mortgage each month — that would be cut pretty quickly.
- We have a lot of automatic savings (vacation fund; savings for our coinsurance and health care deductibles, which we somehow always hit; small automatic investments in the stock market) — we would probably reduce those, or if we could keep those auto-deductions going, I would view that money (especially our vacation fund) as just another part of our emergency fund.
- The amount for monthly food and necessities is highly variable — we could probably cut that down significantly with study and sacrifice. (We had an interesting discussion last year on CorporetteMoms about how much we all spend on groceries for the family if you're curious!)
These are some of our latest favorite financial books for beginners:
Can You Use Your Retirement Savings?
We may do a separate post on this issue (many of these facts we already discussed in our post about how to choose between cash savings vs retirement savings!), but if you're wondering if the money in your retirement accounts is available, here are some quick notes:
- Your 401K may have a hardship exception to the usual penalty you would otherwise face for withdrawing money before age 59.5
- With a Roth IRA, you can withdraw your contributions at any time, but not the investment.
Readers, what are your thoughts? Have you calculated an amount for your emergency fund, or are you just trying to save whatever you can right now? What is included in your emergency fund, and do you have any ideas on how you could cut expenses further if you really needed to?
Where do you keep your emergency fund — is it in a savings or checking account, or are you including other sources in your calculation, such as CDs or Roth IRA contributions?
Stock photo via Deposit Photos / mozakim.
AnonSaver
This is something I’ve been thinking about a lot lately because I work for a non-profit, so am obviously very concerned about a downturn.
Before this, I worked to save 3 months of my net salary, which I still think was a good ballpark for me because I tend to over plan and put off getting started if I feel like I have to fuss around too much with exact numbers.
Lately I’ve been trying to figure out exactly how far that could stretch and what my comfort level is if I do get laid off. I use YNAB for budgeting, and I have my expenses divided into essential monthly expenses (mortgage, utilities, dog, groceries, transportation), fun stuff (beauty stuff, entertainment, dining out, stuff I forgot to budget for), and “save to spend.” The save to spend category is stuff like vacations, auto insurance that’s paid every 6 months, etc.
I added up my essential monthly expenses and the pieces of the save to spend that I would still need (car insurance, disability insurance, life insurance, property taxes). I would like to keep up the life insurance and disability insurance because I’d have to go through the application again if I let those lapse. Then I added a bit for health insurance premium and some allowance for eating out a bit and some entertainment.
The number I came up with is about $1500 less than my net salary monthly, so I feel ok with that number. I figure I could also get unemployment, and the amount I’ve saved for vacation, clothes, etc. can also be used in a real emergency.
I have about 9 months of expenses spread across my various savings accounts if I use these figures. I know that should make me feel pretty secure, especially since it doesn’t include unemployment, but it honestly doesn’t. I grew up poor, so I know what it is like to live hand to mouth, and I’m so scared to go back to that. I’m trying to beef up my official emergency fund to 6 months of my net salary in hopes that will make me feel better.
mclawyer
I am seven months into my first job out of law school. I’m not married but I share an apartment with my fiance. My personal emergency fund is in an Ally account and is $6,000 which would cover my share of the rent, utilities, student loans, and car insurance for 4 months. My retirement is taken out before I get my check so I don’t account for that. I saved this amount in 4 months (on my modest law clerk salary lol) before my loans went into repayment in January. My fiance also has a $7,000 emergency fund of his own. We also have almost $20,000 that we have saved towards our wedding that could be used if it was a true emergency.
busybee
Married couple, own our own home, no kids. Our full e-fund will be 6 months of regular expenses. Husband’s job is as secure as they come, mine less so but still ok. We pay nothing for health insurance and don’t have a deductible so we don’t factor health insurance into our costs. If we had different health insurance I would want 6 months plus the deductible in the e-fund. Right now we have three months but we contribute to it weekly. It is in a HYSA offered by our credit union. We have mutual funds that we could tap into if we really needed to but we would avoid that if at all possible. Once we reach 6 months in the e-fund we will continue to contribute to it weekly and use it for large home repairs. At our current savings rate, it will take us 10 months to reach the full 6 months. It’s honestly not as much of a priority to us as our mutual fund investments, which we are contributing to aggressively for a down payment for our forever home.
Anonymous
If the person whose employer provides the insurance is laid off, won’t you have to pay COBRA premiums to keep the health insurance?
busybee
Husband’s employer provides the insurance. His job is lock tight. If something insane did happen, I would get health insurance through my employer. I had it before we got married and it’s heavily discounted- I want to say it’s $200 a month for family coverage.
Anon
I’m guessing the health insurance is through her husband who she says has a job that is extremely secure. Job security + the healthcare makes me wonder if he’s military
Anon
I found a spreadsheet tracker intended for financial independence/retire early tracking on reddit and started using it (mostly out of curiosity rather than as an attempt to retire early). I put in my take home pay, pre-tax savings (including employer contributions), and total spending each month and it spits out a variety of graphs and metrics, including my savings rate, 12 month rolling spending, 12 month rolling income, and years to retirement at different market return rates.
I’m in a fairly volatile period of life and neither my expenses nor my income are especially stable, so I like using the actual amount I’ve spent as an emergency fund benchmark rather than trying to predict it based on my current budget (and risk not being able to cover something like replacing a car or moving unexpectedly). Right now I keep 75% of the 12 month rolling spending number (so 9 months) in cash, which I thought was maybe too much on the conservative side. After a series of personal emergencies in Jan/Feb, coronavirus, and the economic effects of coronavirus, I’m really glad that I erred on the conservative side.
Anonymous
Do you have a link to the spreadsheet tracker you could post? I have the hardest time finding things on reddit for some reason.
YoungandDumb
wait can we have a link to this magic spreadsheet?!
JuliaBOS
I was also curious. Is this the spreadsheet? https://www.reddit.com/r/financialindependence/comments/aj25f4/i_made_a_fire_google_spreadsheet_for_people_who/?utm_source=amp&utm_medium=&utm_content=post_body
Anon
Yes, that’s the one! I really like it for a bigger-picture look at my overall finances.
Anon
I keep more, (way more) in my emergency fund than the experts recommend. I was considering taking someout to invest it, but chose against it. I am SO GLAD I did, because the day that I feared has come, at the worst time, and I can tell myself, I have the money in the bank to get through this, and it is SUCH a weight lifted off.
I strongly suggest you have enough money to cover your COBRA payments in your fund. This could be a LOT more than what you’re used to paying for your employee share of your health insurance. But when it rains it pours, and you need health insurance coverage.
Anonymous
We’ve got roughly 6-8 months of expenses (including student loan payments; probably more like 9-10 months if the loan payments could be deferred) saved for me and my husband, though it didn’t occur to me to include health insurance premiums in that and I probably should. I graduated law school in 2010 severely underemployed, so the last recession was mentally scarring enough that I err on the side of having a large emergency fund. Realistically the chance of us both losing our jobs at the same time isn’t great, so presumably we’d still have one income and could join the health insurance of whoever was still employed (currently we’re both on our separate employer plans as it’s cheaper).
YoungandDumb
Single, 23, making about $60k (should go up this year since I’m on a GS ladder, fingers crossed!). My savings account serves as my emergency fund, although having grown up learning Dave Ramsey, I really should do better lol. That account is currently $27K. I was hoping it would be more, but I had to dip in to cover some medical expenses earlier this year. This amount would cover about 16-19 months of bare-bones expenses for me (rent + food + transportation + a little extra cushion).
Hoping I can do better in the coming years!
Bee
Posting this on 4/30 so you likely won’t see this but as someone else in their twenties I’d gently suggest that you move some of that money into investments. Even in these tumultuous times, it’s really not advisable to have more then 9 months (maybe 12 given the current circumstances) living expenses in a fund, especially if you don’t have a family to worry about (assuming you don’t). That money is losing value every day if it’s just sitting in a savings account.
Anon
Been thinking about this a lot. I make about 2/3 of mine and DH’s income, but his job is way more secure than mine for the next few years. We have about 8 months of expenses (including some things we would cut back on, like gym, Spotify, and some groceries) if we both lost our jobs. If I just lost mine, we would have way more of a buffer, about 2 years worth.
I would like to add a little more because we could end up having a kid at any point, so some of our emergency fund will end up getting used up if that happens, and obviously our monthly expenses will increase. We’re fortunate in terms of income and pretty low key in terms of life style (especially since dinners out and vacations are off the table these days), so I expect we’ll be able to shore up the amounts to a point where I would feel more comfortable in a few months.
Small Law Partner
We keep 50k in a high-yield savings account. The rest of our non-retirement account savings are in ETFs and corporate bonds (about 80 20 split), so we could get at that pretty fast too if needed. So hard to say what is our “emergency fund.” I guess just the cash.
Our minimum monthly expenses are probably about 6.5k (housing expenses including mortgage, taxes, and insurance are about 5k, no car payment so the rest is just car/umbrella insurance, utilities, food, and discretionary spending which could still be cut back), so I guess that is almost 8 months in cash. No magic formula – 50k just seemed like a good round number to have on hand.
We could also reduce 401k contributions if only one of us was without work because we are both currently maxing that out.
TheElms
Our emergency fund covers 12 months of our mortgage/real estate taxes. Other than daycare, I don’t have the most accurate sense of what our other expenses are on a monthly basis, but even assuming they equal our mortgage which is large (seems unlikely) we’d have 6 months of expenses if we both lost our jobs (seems unlikely). I think with some economizing we probably have more like 9 months of expenses with no income coming in. And we have other savings like vacation fund, new car fund, saving earmarked for retirement savings in non-tax advantaged accounts that we could also tap. I’m risk averse by nature, but this feels like it should be enough.
Vicky Austin
Both DH and I are pretty risk averse, so ours is currently somewhere between 3 and 6 months of expenses and we’re working to get it solidly to 6 months. We calculated this based on a budget for bare-bones expenses as other people have done, but I designed our budget to have room unless all the bills in a certain category hit at once (e.g., utilities allows for our quarterly trash collection bill or yearly PO box fee in any month in addition to regular stuff), so there’s probably a little wiggle room in there.
Anon
I have one paycheck (two weeks) saved. Obviously I’m not “set” but I’m proud of it given that a year ago I was making 2x as much, had no (non-retirement) savings at all, and was carrying 10k in credit card debt (that’s now in a low interest personal loan and 70% paid off). Last May I switched jobs, took a huge paycut, and finally started taking budgeting seriously. Just thought I’d throw that out there in case anyone else is feeling discouraged by these other numbers and wants to feel better in comparison to someone.
SGG
I think your honesty and send awareness are laudable. Preferred not perfection! Keep it up!
Ses
Thanks for posting this. And congrats for being a paycheck ahead, and having your loans well-managed. I have been at the zero-savings place, and when I got to the 1-paycheck level I felt I had a little breathing room – not enough, but my rent was 1 paycheck at that point, so it was meaningful. I’m a few (many) years down the road of taking my finances seriously, and really grateful to my past self that I did.
If you haven’t read it yet, this is inspirational for the newly budget-inspired: https://www.thebillfold.com/2016/01/a-story-of-a-fuck-off-fund/
Anon
That’s so good to hear! We typically haven’t had cash set aside for emergencies but sort of looked at our 401k and 457 as savings but since COVID started we have started putting money aside in a separate savings account. Yesterday my salary was cut so it seems very real all of a sudden. I could be furloughed or laid off at any time but not likely for my spouse.
I will feel comfortable when we have 6 months of savings to pay our mortgage and health insurance. My student loans are almost paid off.
SGG
And my lousy texting skills will make many feel better in comparison! ;-)
Self awareness… Progress not perfection!