How Much Do You Need In An Emergency Fund?

It is common practice that a typical emergency fund should be 3 to 6 months of essential expenses. Typically 3 months is sufficient if you have a secure job with consistent pay or there are two spouses working full time in the house. Typically 6 months is best if you have inconsistent pay (commissions, bonus, etc) or only one household member works. 12 months might be needed in situations where only one person works and their income can vary significantly, for example, a mortgage broker, real estate investor, or an independent consultant with only a few clients.

However, how much your expenses are in an emergency is much different than how much your typical expenses are. I trust that if you lose your job, you won’t be planning a luxury vacation. These are considered discretionary expenses and should not be included. For this purpose, we will only look at what the expenses would be to keep the household going. I realize this will vary from family to family but below are the expenses that I include in my emergency fund calculation. 

Essential Expenses (include in emergency fund calculation) 

• Groceries 

• Utilities 

• Mortgage/Rent 

• Transportation 

• Home repairs and supplies 

• Insurance 

• Taxes 

• Medical 

• Pets 

• Personal Care (basic hair, clothing gym, products, etc.) 

• Internet 

Discretionary (do not include) 

• Dining out 

• Gifts 

• Home Goods 

• Subscriptions

• Entertainment (vacation, concerts, movie out, etc.) 

• Automatic savings

• Giving

For example, below is a household with one spouse working and a net monthly income of $10,000.

With $5,000 in monthly essential expenses and an emergency fund of 6 months needed, they should have at least $30,000 set aside in cash savings.

Thank you for reading,

Alex

This blog post is not advice. Please read disclaimers.