How Large Should Your Emergency Fund Really Be?

This question has been debated by financial experts time and time again. How much money should you have in that rainy day fund? What is the magic formula?

  • Dave Ramsey has recommended saving 3-6 month’s worth of expenses after all non-mortgage debt is paid off.
  • Suzy Orman has recommended saving 8 month’s worth of expenses before paying off credit cards.
  • David Bach has recommended saving at least 3 month’s worth of expenses by automatically depositing [5%] into a savings account.

While all of these are great suggestions, it can still be difficult to know exactly what to do given the vast amount of advice.

Then comes the faith issue. Some Christians have questioned having an emergency fund because it could lead to trusting in money rather than God. Bob tackled this problem in a great article entitled, “Would Jesus Have An Emergency Fund.” I highly recommend you read it if you are struggling with this issue.

Once you have decided you should have an emergency fund, the question of how much money you need inevitably comes up. To answer this question effectively, we must consider the PURPOSE of an emergency fund. It is obvious that this fund is for emergencies . . . but what kind of emergencies?

A Few Emergency Scenarios:

  1. Your household income stops (aka, everyone loses their jobs). Estimate how long it will take everyone to find jobs again.
  2. Medical issues arise. Medical bills are one of the leading causes of bankruptcy in America. If you were to have major surgery, how much do you think that would cost? To curb costs, make sure you have great health insurance.
  3. Home repairs are needed. If your septic tank goes out, you might have to dish out thousands of dollars. If your home gets flooded or catches on fire, damages can be widespread. Of course, it’s important to have in place great homeowners insurance.

These are just a few of the major issues that can arise. There are many more smaller expenses that might be considered emergencies. For example, check out some of our emergency expenditures from last year.

No Magic Formula, Just A Customized Plan

The truth is that there is no concrete magic formula. Everyone’s emergency fund will be different. However, there are some great rules of thumb to follow. I’ll share with you how my family saves and the goals for our emergency fund.

First, we are currently building 6 month’s worth of expenses in an ING Direct Savings Account. Although we can probably get by with a 3 month emergency fund, it gives both my wife and I great peace of mind knowing that if a doozy of a storm hits, we’ll be okay. 8 month’s worth seems excessive at our average income level (we have variable income). The ING Direct Savings Account is very liquid as well, which makes it easy for us to transfer money to our checking account should an emergency arise.

Second, we chose to put that emergency fund in ING Direct so that it could be labeled for “emergencies” and nothing more. This separates it from our brick and mortar bank so that we aren’t tempted to use it for non-emergencies.

Third, we take any extra cash we have and throw it toward the emergency fund. We have not chosen to automate our savings because we feel that it would give us an excuse to spend extra cash elsewhere. This results in us putting in between 10 and 20% of our income (varies month to month) into our emergency fund. We will continue at this rate until the emergency fund is fully funded.

The location, size, and monthly contribution amount of your emergency fund will likely be different from ours. There will be times in your life where it is better to eliminate debt rather than contribute to an emergency fund. There will also be times in your life where you need to severely cut back your spending so you can pile up cash for a pregnancy or other significant life event.

Everyone should implement a plan to build an emergency fund. The details are up to you. But make sure to take your umbrella out! It will rain sooner or later!

The prudent see danger and take refuge, but the simple keep going and suffer for it. -Proverbs 27:12 NIV

How much do you have saved in your emergency fund? What other emergencies are you saving for?

Photo by wayne.vernon

  1. We’re still trying to narrow down what we consider an emergency! Therefore we know what to save for..

  2. My wife and I have a two step plan.

    1) While we are attacking our debt, we want to have $2,500 for emergencies.
    2) Once we are out of debt, have 6 – 9 months of living expenses.

    I agree with you in that there is no one plan that works for everyone. You have to factor in your family needs, how volatile your income is, they type of expenses you are subject to, and other factors.

    Great article.

  3. Jessica

    My husband and I saved up about $10,000 in our emergency fund and we are so glad we did because just as we had finished saving, the car needed repairs, we had unexpected moving expenses and we owed big time on our taxes. It wasn’t fun paying for so much all at once but that emergency fund sure did take a lot of the pressure and stress away.

  4. Money Green Lufe

    I would like to have 1 year’s worth of savings for this purpose. I agreed with 3-6 months maybe 10 years ago when it took Ana average of only couple months to find a job. nowadays I believe the average time to find a job is about 6-8 months. A years worth may seem a lot but once you get there, you don’t need to continue to add funds to it as long as you don use it.

  5. Bryan Cooper

    I recommend to my clients that they have one month of Emergency Living Expenses for every 1% of unemployment. Great article!

  6. Gholmes

    We have 3 months now and building slowly towards 6 months then will stop. It sits with our local bank in a seperate account labled emergency fund.

    When we first got out of debt we had to dip into the emergency fund for the unplanned but reasonably expected expenses.

    My hope now is that we never have to touch the emergency fund. We have another account that we have savings we do for car replacement, home repairs, christmas, God only knows (GOK), etc. That is the account when we had to have $450 brake job this year that we dipped into our car replacement savings. Also we have a Health Savings Account we are trying to build up.

  7. I’m encouraged that all of you are thinking through what type of emergency fund is right for your family! I know you won’t regret it. Thanks for the comments!

  8. Adventure-Some Matthew

    My wife and I have enough to cover 6 months in our emergency fund. We also have a separate fund for car repairs (which came in handy a few weeks ago with the fender-bender), health issues, and family emergencies (which let me take a week off of work to help my mom and grandmom after my grandad passed away).

  9. John, great question to ponder. I think it’s all about risk mitigation. It’s actually hard to identify all the risks one could encounter and the potential cost of those risks. I think that’s why the gurus have just picked 6 months, a year, etc. as the default amount of the emergency fund. Still, I think people can decide if 3, 6, 9, etc. makes sense to them depending on job stability, sources of income, health, children, and probably some other things. Certainly, too much can be hording and not trusting God to provide. But, too little isn’t wise. I encourage people to think about their situation, pray for guidance and at the end of the day pick the amount to save in which they are most comfortable.