It’s a question within the basics of finance that always seems to be up for discussion. How much should you have in an emergency fund? The answer I will give you, of course, is it depends.
I know that the “it depends” answer is a bit of a cop-out, but it truly is the best answer to the question. It depends on your particular situation and what kind of person you are. That’s my opinion.
A Few Professional Opinions
Most publications, books, etc. will suggest having enough money to cover three to six months of non-discretionary expenses is the sweet spot. I totally agree, but I also know that number can be very intimidating.
Then there are others, such as Dave Ramsey, who suggests a smaller number to start. Ramsey’s number one Baby Step is to save up $1,000 to start your emergency fund. Step two jumps straight to pay off all of your debt.
I went through Ramsey’s Baby Step program with my parents ten or so years ago and to be honest, it’s a great program. It’s practical, achievable, and a smart way to get yourself into a good financial situation. I would highly recommend checking it out.
But I knew I needed more than just $1k, given that my situation was not the norm. I knew it was going to take me a good few years to pay off of my debt and having just $1k in the bank to cover emergencies for multiple years was just not going to cut it.
My Emergency Fund Story
When I started my first true after-college job, I had more than twice as much debt as I was being paid. As in my annual salary was $34k and I owed a little more than $70k in student loans and had a $5k car loan. On top of that, my rent was $900. There were no utilities included in that either.
Not a great situation. That $1,000 emergency fund would have paid my rent for one month and not much more. No student loan payment, no car payment, no gas or groceries. I could probably keep the heat on in my one bedroom apartment and that’s it. For just one month.
That small of an emergency fund made me want to hyperventilate. So, after learning about Baby Step One (and taking everything with a grain of salt), I took some time to assess what amount would make me feel comfortable.
I focused on slowly building up my savings. At three thousand dollars, the amount that made me feel comfortable, but still less than three months expenses – I started to work hard at paying off my debt.
Employ A Fluid Strategy
Now that I have my debt paid off – years I tell you, years – my emergency fund considerations have changed.
When I was working, the amount I set aside was not that much higher than when I was paying down loans. I maybe had five to seven thousand that I kept in a savings account that I didn’t access. The account was held at a separate bank than my everyday accounts. I know myself, this was necessary to keep me from thinking I could spend it.
Now, I’m not working. But Dave and I still have a mortgage and bills, and we still like to go to breweries and enjoy our hobbies. So my emergency fund is substantially higher.
What an easy thing to do right? Just up my savings amount just like that? Yeah, I wish. Increasing that amount took planning.
I knew that I was going to take some time off of working, so I made some sacrifices and saved extra money. I put it away in that separate bank and let it grow at the tiny interest rate that was just barely above inflation, until I had enough to feel comfortable carrying out my quit-my-job plan.
When I start to feel uncomfortable, I’ll start looking to make some income. And yes, I am not above coffee shop barista or dog walker. I’d actually prefer it. Or maybe a brewery. Just not a corporate, stay-in-your-swim-lane, want-to-be-C-Level type of desk job. Not yet.
Assess Your Individual Situation
No matter what you read or what someone tells you in a seminar, only you can decide the number that needs to be in your emergency fund. Your situation is unique to you, as is your personality. I’m very Type A and need to feel secure. Others may feel comfortable playing it by ear and know that they can make ends meet with side jobs or what-have-you.
To help you decide how much you need in your particular situation, try asking yourself any of the following questions:
- How secure is your current position?
- What would you do if you lost your job?
- How quickly could you find another job?
- Are you willing to take a job that you may consider “beneath” you in order to make ends meet or will you hold out to get that perfect job?
- What is the minimum dollar amount that you can live on in a month? (Be brutally honest here. I’m talking the free entertainment and Cup-O-Noodles type of minimum amount.)
- How easily could you get extra income? Such as extra roommates, side jobs, temporary jobs, making a plea to parents or siblings, etc.
If you still can’t come to a decision as to how much you should set aside, then feel free to take the advice from someone like Dave Ramsey and start with $1,000. You may decide that you want to increase that number once you have a grand in the bank. You may not. In the end, it’s up to you and it’s no one’s business but yours.
Quick Side Note:
If you are lucky enough to have family or friends that are willing to give you a little extra help during tough times, reach out to them if you ever find yourself in that tough situation. That is what they are for.
Even if they don’t support you financially, they are still a great source for networking. They may give you ideas so you can make extra money. Or they may just listen to you and be there emotionally.
But if you do end up actually asking them for money, please don’t do it through the internet. No crowd-sourcing your friends and family so you can pay your rent.
Why? Those crowd-sourcing sites come up in a Google search of your name. And it isn’t going to look good to a potential employer or bank that may be considering giving you a loan. They want to know that you have your financial life together before taking a risk on you.