Thinking About Your Emergency Fund
Posted on October 13, 2007 by Eric
Filed Under Household, Savings
If you’ve been reading much on this blog, or pretty much any personal finance blog, book, forum, or magazine, you probably know the importance of an emergency fund. Everyone should have an emergency fund. The “Why” is easy - you need to have some money to fall back on in case of an emergency. This keeps you from going into debt to fund your emergency, and provides a safe cushion for rough times.
Any amount of money is good to start. The question then becomes how much is enough? I’ve seen a lot of different answers for this, but most people seem to suggest between 3 and 6 months living expenses. Why that much? If you lose your job it might take you 3-6 months to find a new one. If you can avoid debt, you’ll be much better off in the long run.
At first, we started looking at our living expenses and calculated a number that seemed much larger than what we thought it would be. We based everything on our current budget.
The key for us was to think of the expenses we would have if I lost my job. For most folks, this will be a lower number than what your normal budget might be (depending on how frugally you live now). If I lost my job, we’d be going into emergency mode and cutting out as much as we could from our budget. If it wasn’t essential, it would probably have to go. What’s essential could vary significantly from person to person. Here are some of the things we considered:
- Food costs - We’d definitely be eating much more frugally. We eat pretty frugally now, but we could definitely be stingier with our food budget. I’m certainly willing to eat a peanut butter sandwich for dinner when times are rough, but when they aren’t, I’d prefer some fresh food.
- Phone - I’d cut down on our cell phone plan right away. I wouldn’t need the data plan if I was out of work. I would need the cell phone as I did my job hunting so I could always be accessible. I might get rid of the landline phone altogether.
- Cable - this one goes right out. I certainly shouldn’t spend my time in front of the TV when I should be out looking for a job.
- Internet access - I’d keep this for sure. This is most likely how I’d be looking for those jobs.
- Cars - definitely would have to watch how much we drove. Consolidate trips so we could spend less money on gas.
- TiVo, Netflix, and Soda - Gone, gone, and gone.
- Electricity - Hello open windows! Goodbye air conditioning! Well, it’s gonna depend on the time of year, but you get the drift.
- Water, Gas, and other utilities - minimal changes resulting in minimal savings.
Taking those things into account (among others), we figured out what our real cost of living for a month would be. It was quite a bit lower. This gave us a more realistic view of the numbers we’d need to hit in order to have 3-6 months of living expenses set aside. This was a much more achievable goal.
Our short-term goal is to save up 3 months of living expenses. That is 3 months of cash assets in a high yield savings account (or maybe a Vanguard money market fund) based on a reduced lifestyle. The longer term goal is 6 months. We’re still a ways off of having 3 months, and it will take until after we move before we can start building that up again.
Image by laffy4k
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You are so right. It’s amazing how much you can cut expenses when you need to. When my husband lost his job in May, we had an emergency fund equal to about 2 months of his normal salary, but we’ve made it streeeeetch through a series of lower-than-normal paying jobs, and we still have about half of that emergency fund left.
Now we just have to get his income back up to normal, so we don’t go through the rest of the emergency fund before the year is out. :)
[...] Thinking About Your Emergency Fund @ A Penny Closer — Emergency fund is not only about what you save, but having a plan to cut all unnecessary expenses right away. [...]
Lynnae - Sorry to hear your husband lost his job.
It’s great you were able to stretch your emergency fund that way. It’s a good thing to know how we can drop our budget if adversity hits
I’m currently working towards the same goal. My first order of business is to reduce my expenses by 30% and funnel this money into an ING account.
ThirtyAndBroke - That sounds like a great plan. Radically reducing our expenses was our first step as well, and now we’ve been putting money in our ING account to build up the emergency fund.
[...] Thinking About Your Emergency Fund I recently wrote an article on the same thing, but I like the way Eric stripped away non-essential expenses to figure out what their emergency fund should be. [...]
[...] Thinking About Your Emergency Fund @ A Penny Closer — Emergency fund is not only about what you save, but having a plan to cut all unnecessary expenses right away. [...]
[...] Penny Closer warns not to be stunned At everything for your emergency fund. And Everyday Finance says, “You silly clucks! Emergency funds saved me thousands of [...]
Wise moves. After all, emergency funds are for emergencies. Netflix is not an emergency…unless you’re a film critic or somesuch. ;-) Hope you don’t have to use it!
Mrs. Micah - You are absolutely correct! Netflix is not crucial. But it was interesting for us to think about how minimally we could live. Our lives are much more frugal now, and we are still very happy. We still have some luxuries in our life, but we know their exact impact and we accept that, In an emergency, we still have room to cut, but we’ve also identified areas we could cut if we really want to save up for something. Overall, it was a good exercise for us to go through.
Thank you for the comment! And I hope we don’t have to use our emergency fund either :)
Saving up for a rainy day is a great idea, and even better is maintaining a strong network of old coworkers and industry contacts, and constantly keeping an eye on the job market so you’ll know what’s out there in the event you have to find a new job in a hurry. You’ll need lots of people to turn to!
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