Frugal | How Much Emergency Fund Do You Need?

How Much Emergency Fund Do You Need?

Posted by Lynnae on December 13, 2007

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Car EmergencyYesterday at I’ve Paid For This Twice Already, Jaimie posted about why she has a $1000 emergency fund. She encouraged her readers to post about their emergency funds, too. So here’s my story.

There are two personal finance experts that I look up to: Dave Ramsey and Mary Hunt. They are both huge advocates of getting out of debt, but they have very different approaches to the process.

Dave Ramsey’s Baby Step #1 is saving a $1000 emergency fund. After you’ve saved $1000 for emergencies, you are free to pay down your debt with gazelle-like intensity.

Mary Hunt advocates saving a $10,000 emergency fund before attacking the debt with everything you’ve got. Her reasoning is that you need 3-6 months worth of money in the bank to take care of even the most expensive emergencies, so you won’t be tempted to reach for the credit card when a small emergency strikes.

I can see both sides of the issue, and I take the middle ground. Right now my husband and I have an emergency fund of around $2500. That’s down from $5000 before my husband lost his job. We have a couple of reasons for wanting a medium sized emergency fund.

First, my husbands career is in a very unstable field. There’s no such thing as job security in sales. And we’ve learned that several times over this year. That coupled with the fact that I’m a stay-at-home mom means that our financial situation is always precarious. We need at least a month’s worth of expenses in the bank for emergencies, in the event that my husband is without work. That will give us something to live on while we’re waiting for the unemployment checks to kick in.

We don’t feel we need the whole $10,000 in the bank, because we are both really resourceful and not afraid to work a wide variety of menial jobs to keep afloat during tough times. There’s almost always work out there, if you’re willing to do the work, so we’re not afraid of being completely without income for long periods of time.

The other reason that we need an emergency fund that’s greater than $1000 is that neither my husband nor I have a huge risk tolerance. We’re committed to not using our credit cards anymore. But if our emergency fund was only $1000, both of us would be worried that we would need to use credit to bail us out of an emergency.

In the end, I agree with Jaimie in that the amount of emergency fund you need is highly personal. If you’re in a stable career and have a high risk tolerance, $1000 may be enough. If you have a low risk tolerance and you’re in a field where job security is non-existent, saving a full 6 months worth of expenses would be the prudent thing to do.

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Comments

18 Responses to “How Much Emergency Fund Do You Need?”

  1. paidtwice on December 13th, 2007 4:31 am

    Thanks for sharing your take!

    I don’t think I have a very high risk tolerance, but my spouse is in a very stable job. My risk tolerance is decreasing though I think. :)

  2. Randall on December 13th, 2007 5:22 am

    I used to have only $1000 before for the emergency fund, but then one time I got a windfall (changed jobs, etc.) and built it up to $10,000. I found out something surprising. For ME I was much more comfortable having that sizable amount of cash than the $1000. I figure if it’s a TRUE emergency, it’s going to take more than $1000 to recover anyway.

    No job isn’t an issue, as Lynnae probably can testify. If you’re halfway resourceful and willing to get your hands dirty, you can get by w/o using emergency funds anyway.

    I think it’s the comfort level that’s attractive to me, and I’m very risk tolerant. It pushes my job from the ‘must have’ category and gives me a little breathing room.

  3. FinanceAndFat on December 13th, 2007 6:28 am

    Like PaidTwice, I have started with a $1,000 emergency fund while I get out of debt. For me, just having that was pretty amazing since I had never managed to keep money in the bank for very long in the past.

    However, I am slowly increasing that emergency fund and once my credit card debt is gone I plan to bring it up to the 3-6 months of expenses range.

    Ultimately, I want probably 6-12 months of expenses available in cash. I have a fairly high risk tolerance, but I have found having that cash there for a rainy day make me feel a lot better about my finances in general.

    As for the $1K vs $10K debate…it is of course personal preference, but someone making $20K - $30K per year would have a really hard time saving $10K and it may discourage them from getting started in the first place. I think that is the point of starting with 1,000.

  4. Lynnae on December 13th, 2007 7:12 am
    @paidtwice - I think having a stable job makes all the difference. When my husband worked for a small Christian radio station, we knew he’d never lose his job, even though the income was really small, so we didn’t worry too much about an emergency fund back then.

    @Randall - I can’t wait for the day when my husband’s job isn’t in the “must have” category! :)

    @Finance and Fat - Good point about income being an issue. Still, if it’s an unstable $20K-$30K, aiming for a little bit more than $1000 to start with might be good, even if it’s not the whole $10K.

  5. Lee on December 13th, 2007 8:20 am

    This is a great topic! I’ve been trying to save up an emergency fund for a while now and not getting very far. My family’s income is variable, also, with my husband in the ministry and me at home with 3 children. Lynnae, I’ve really enjoyed reading your blog for several months now…can you tell me how you’ve managed to build up the emergency fund? It seems we are either behind on bills or else we have enough for groceries and not much else…where can I find the money for emergencies when there doesn’t seem to be any extra?

  6. Lynnae on December 13th, 2007 9:14 am
    @Lee - Honestly, the only reason our emergency fund got so high this year is because we received a small inheritance, and that’s what we used it for.

    I do think it’s important to save a little money every month, even if it seems you can’t afford it. I shoot for 10% of our income, but sometimes there’s just no way (like now). But I do try to save a small amount, even if it’s only $10 a month. I also put any “extra” income towards savings. Things like income from eBay, tax refunds, etc.

    This is actually a good post idea. I’ll try to write on this sometime in the next week. :)

  7. Early Retirement Extreme on December 13th, 2007 9:27 am

    Let’s see. I have a (one) credit card with a $2750 limit. The balance is paid off in full every month. This is fueled by a checking account containing about one month worth of expenses which in turn is fueled by an ING savings account with about 4 months worth of expenses. That in turn is backed by a larger brokerage account (taxable - not IRA).

    What I don’t have is $500 in small bills at home which I really should have in case we get hit by an earth quake and all hell breaks loose e.g. the ATMs/internet stop working.

  8. Lee on December 13th, 2007 10:15 am

    I appreciate your response… you gave me some good ideas for saving. I do some online surveys and make a few dollars here and there. I could put that towards the emergency fund, instead of immediately spending it. Also, I save most of my coin change. It eventually adds up….thanks, Lynnae, for the needed encouragement!

  9. MichelleH on December 14th, 2007 9:18 am

    Hey Everyone,
    I got in on this one late - I don’t have internet at home, only at our business (being frugal and all).
    I’m trying to build up at least 3 months of income in our emergency savings while trying to get completely out of debt. We weren’t comfortable with only $1000 set aside as we’re self-employed. If my husband were to get hurt or sick, I’d basically be unable to make enough to live on as we live in an economically-challenged area. It’s hard but we keep adding to it every month. Lynnae, I think that you’re so right in just saving as much as you can even if it’s $10 a month. It adds up over time. We’re in our 40’s - wish we’d done this all sooner. Good for all you younger ones!

  10. Jennifer on December 14th, 2007 10:03 am

    Like Michelle, we have a small emergency fund of a few thousand dollars, and are chipping away at debt, but at the same time we are working to get an emergency fund of 3 months worth of income.

  11. Flexo on December 16th, 2007 10:04 pm

    I have about $7,000 in an account called “Emergency Fund” at the bank, but I have more in savings earmarked for various things. I could cover several months of expenses if necessary. On top of that, money invested (but not investment returns) into a Roth IRA can be withdrawn at any time, tax and penalty free.

  12. Lynnae on December 16th, 2007 10:23 pm
    @Flexo - That’s the point I hope to be at someday. Hopefully sooner rather than later. :)

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