How Much To Put In Your Emergency Fund

by mike on December 3, 2011

I often advise people to have an emergency fund in place.  It is important to take a quick look at how much should be in that fund.

It really depends on where you are at on your financial journey.  If you are deciding to get out of debt and live on a budget, then I recommend starting out with a small emergency fund.  It doesn’t make much sense to start paying down your debts without anything to fall back on if  when an emergency comes up.  Without any money in savings, you will have to put use debt which sets you back a step.  I often say it is like trying to climb and ladder while someone is cutting off the bottom every time you go up a rung.  You never get anywhere.  Back to the amount.  Depending on your income, I recommend starting out with somewhere between $500 and $2,500 in your emergency fund.  If you make less than $20,000 per year, then $500 will be sufficient.  Otherwise, it will take you forever to get the fund in place, which means you can’t move on to paying down debt.  On the other side, if you make $100,000 or more, then putting $2,500 away isn’t a bad idea.  It shouldn’t take too long to put aside that money.

Once you have your debt paid off (or if you don’t have any to start with), then I recommend putting 3-6 months worth of your expenses in an emergency fund.  That way, if you have would happen to lose your job, you could cover your basic expenses for several months no problem.  So, if your monthly expenses to run your household total $3,000, then I would recommend having a $9,000-$18,000 fund.  It is up to you whether you lean toward the lower end or upper end.  I recommend erring on the side of the $18,000.  Chances of regretting having that money there are small, but you may regret having too little.

One final note about emergency funds: this money is not used as an investment.  You can search around to find what the best interest rate you can get in a normal account (online bank, local savings, money market, etc), but do not treat it like a long term investment.  The key is that it is readily available and you are not putting it at risk.

Ok, one more final note: if you are married, you must decide on what constitutes an emergency.  The sudden need for a speed boat probably doesn’t count as an emergency, but it is up to BOTH spouses to agree on what does count.

Happy saving!

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