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You must know what, why and how of an emergency fund. You definitely need to have that liquid cash readily accessible for you needs like a sudden health issue or loss of a job or even unexpected expenses. That liquid cash is something that you will need to consciously build before you start putting money into some of the best investments that you have planned for the retirement.
Size of the fund and the peace of mind
The size of the emergency fund is something that you will need to define for yourself. Typically this fund should be equal to 3 to 6 months of income however, I do not think that is a fair calculation. The emergency fund should be based on some hard cold facts, like your monthly expenses. That you will be able to arrive at only if you have a budget and you know how much goes out each month.
If you are not budgeting, I would suggest that you start doing it right away else there is no way you will build an accurate corpus of an emergency fund and I am sure that there is no way for you to know that you are over spending or under spending.
Tools for Budgeting
There are templates for budgeting, you can use SB’s Budget Template. Basic budgeting can be done even on a simple spreadsheet and realistically speaking that is all you need.
However with new technology comes new solutions and there are a number of personal finance apps that you can now download and do the budgeting stuff on a breeze.
Once you have that figure of the average monthly expenses, I suggest that you make sure that you understand why do you need an emergency fund.
One of the need could be a loss of a job. Will you be able to find a new job in six months or at least you will be able to create a new income stream in six months? If yes then go for six months emergency fund, else go for a higher emergency fund.
Emergency fund – Don’t stash it under the mattress
An emergency fund should be liquid and easily accessible while being safe. Cash stashed at your home is not a good idea for an emergency fund. Interest paying checking accounts or saving accounts can be a very good idea to keep money safe while earning interest on the money.
CD’s can be a good idea too, but keep in mind having an emergency fund in CD has its disadvantages as you will not be able to withdraw money without paying the penalty before the term ends.
However, I like savings accounts better as you can just get to the ATM and withdraw the money when an emergency situation arrives. Be careful not to incur any ATM Fees, so choose your bank carefully.
Peace of Mind
The size, the place is about how comfortable you are. If you think that you are comfortable with six months then so be it. It is all about having that peaceful sleep at night knowing that if tomorrow something happens then you have the money to tide it over.
Readers, do you have your emergency fund created and kept in a separate account? If yes, how much is its size in terms of monthly salary?
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I always find the controversy about how much to have in an EF and where to put it to be so hilarious, because there’s SO MUCH to think about, how could any one way be more right than another! For me, I have about three months expenses put away. It’s not as much as a lot of people, but for me, it’s an amount that I’m comfortable with, for a few reasons. 1) I’m relatively secure in my job 2) Should I for some reason lose my job, I’m relatively confident in my ability to find another one within three months, and if I’m not, because I do a lot of freelance on the site, I’m completely confident in my ability to bring in enough side income to stay afloat and 3) I don’t have any regular payments other than rent, so absolute worst case scenario, I move back in with my parents. No mortgage, car or student loan payments to default on.
My emergency fund is split between my chequing account (so I can keep a minimum balance and avoid paying fees) and a savings account. Nothing fancy.
I always think that emergency funds should just be whatever amount makes you feel comfortable – I’ve got none right now but my 1000 baby step e fund. However you do make a good point – if you’re laid off, you stop having expenses (like eating lunch out) and gas to commute to the office, so your money will go further.
It depends on what you count as an emergency fund. In my fund for lay-offs I only have $2000 but I have savings for our next car and if need be, we could pull from that ($1300), repairs for the car ($650), savings for if/when we get pregnant ($2000), and of course, car/home/disability insurance. I find it necessary to have a small EF but I think having multiple streams of income is more useful and where I focus the most of my efforts towards.
Ginger, good point. My EF (1 year) is actually made up of several smaller cash accounts that serve other purposes like car repairs, house repairs, etc.
We have about 4 months of expenses in our emergency fund. It’s good to have liquidity during uncertain times. With the down market, I can use some of the emergency fund to purchase equity at a discount. We can replenish the EF later.
I like having an emergency fund that is enough cash to cover a year’s worth of basic expenses… nothing extra. I also don’t include stocks or other investments in this calculation. Dave Ramsey suggests $1K and that is advice I disagree with… $1K wouldn’t last long at all in a true emergency. There is where having a year’s worth of cash set aside give a lot more peace of mind. Even 6 months is a good buffer against tough times.
I have a very high security gland. Even when a job seems stable I’m always thinking the worse case scenario. At the moment we have about 6 months? but I want to continue to add to it. It never hurts to have more saved only hurts when not enough is saved. I just need to find a balance but my security gland wont’ let me and I know I will need to work on that.
Hello, there is no harm in keeping emergency fund bigger. But, keep in mind that emergency fund is usually kept in low interest paying account. Where you might lose on the potential bigger gain by investing that money else where.
and thank you so much for comment
With the current down economy, 6-12 months of emergency fund is typically recommended. Nice article 🙂
Thanks Mary, appreciate your comment
This really is a thing I have to find more information about, thank you for the post.
would tell me what are you looking for?