Telling you how much money you should have in your emergency fund is a bit like telling you to order anchovies on your pizza (I would never do that…yuck), I’m not the one that is going to eat it so really, it is none of my business. Your numbers should be determined by you, based on your own circumstances and personal taste for risk.
Personal finance is just that…personal.
That being said, I can share my prompts that I use to figure out how much money to set aside for rainy days. In this post I will outline the questions that I asked myself to determine how much money to keep for each of the 5 types of emergency funds that I keep. At the bottom, I’ll share my initial emergency fund totals and our current emergency fund totals.
My biggest tip for you:
Don’t pick emergency fund amounts that are arbitrary and uninspiring. Instead, structure your emergency funds with specific intentions and emotionally powerful purpose.
The point of this exercise is to get really intentional about what the money you are saving is for and what it is not for. If you pick an arbitrary number, like $1000, without outlining WHY you need $1000, it’s going to be difficult to save and keep that money. If you would like more tips on putting more “Why” behind each emergency fund or the 5 types of emergency funds that I set, you can view them here in my post from last week.
How I calculate the amount to save for each fund
Death Fund
Purpose: Money set aside for the most likely life/death scenarios I might face. The purpose of the “death fund” is to either be the final dollars that I spend on food to prevent my own starvation, if a parent/sibling dies or money for my end of life care/funeral costs so that my family doesn’t have to be so burdened financially.
Part 1 Questions:
*What’s the bare minimum amount of money for emergencies that you want to always keep, no matter what?
*Who are the most important people in your life that you want to be there for in life or death situations?
*What 3 emergencies are you and these loved ones most likely to experience?
*What is the estimated cost for each of these emergencies?
Example:
Little brother being injured in skateboarding accident and sent to Seattle hospital for care. Estimated cost in 2006 was: $950 for gas, hotels and food.
Part 2 Questions:
*Who is going to pay for your end of life care and funeral costs?
*What is the average cost of a funeral in your area? (Montana average=$7000)
*How much, if any, of these costs do you want to leave money for?
To Calculate Death Fund Amount:
Low savings currently? Take the lowest of these prompts (excluding 0’s) from both Parts 1 and 2 and that is the amount to save for your “Death fund”.
Looking to increase savings? Take the average or highest of these and that is the amount to save for your “Death fund”.
Job Loss Fund
Purpose: Money set aside for job loss for me or extended family or close friends (my top 3). This is basically a backup for the Death Fund. To be able to use these, no one has to die but basically, a serious scenario has come up that results in extended unemployment. I think of this as a 3-6 months of expenses kind of fund.
Questions:
*In the case that income is lost, how many months would it take to find new income? Based on data from August 2019, the Bureau of Labor Statistics reported that the average duration of unemployment was 22 weeks. However, this is going to vary based on the industry that you work in and how much demand exists for your skill set. Most financial experts recommend having 3-6 months of expenses for this reason and I agree that somewhere in that range seems appropriate for our household.
*What is your bare minimum cost of living expenses for one month? If an emergency occurred, it would be easy for us to cut back spending on travel, video games, and our other preferred methods of discretionary spending so I exclude those from this calculation.
To Calculate Job Loss Fund Amount:
Number of months from Question 1 multiplied by bare minimum cost per month from Question 2.
Common Shortage Fund
Purpose: Money set aside for medical expenses, car breakdowns and other unexpected bills. Cars have a defined useful life; we know they won’t run forever. I don’t consider car deaths to be serious emergencies, worthy of tapping previous two funds to repair. If transportation is important to you, I’d recommend having a separate fund like this one so that you are prepared to replace your vehicle (even just with a bare minimum car) if it dies unexpectedly. I also use this fund if I have other unexpected expenses pop up, like a $2000 dentist bill for example.
Questions:
*What’s the annual Out-Of-Pocket Maximum for your health insurance?
*What’s the cost of the cheapest car you would be willing to drive temporarily if your current vehicle breaks down?
*If you own your own home, what are the three most likely replacements that you may need to make? How much would each cost?
*If you rent, what is the average deposit you would need in your area to get a new place if you needed to move and your current landlord was slow to return your deposit?
To Calculate Common Shortage Fund Amount:
Low savings currently? Take the lowest of these prompts (excluding 0’s) and that is the amount to save for your “Common Shortages Fund”.
Looking to increase savings? Take the average or highest of these and that is the amount to save for your “Common Shortages Fund”.
Minimum Balance Fund
Purpose: To prevent cash shortages I keep a small amount of money in my checking account to prevent bounced checks and overdrafts. This has varied between being the minimum account balance (like $100) to one month of expenses. Maintaining one months’ worth of expenses in cash allows us to not have to fuss around with weekly budgeting.
Questions:
*What is the bare minimum you always want to have in your checking account to prevent bounced checks and overdraft charges?
*What is the biggest payment you make each month? (For most people this is rent/mortgage)
*Do I want to keep a full month worth of expenses in checking so that I can avoid weekly budgeting?
To Calculate Minimum Balance Fund Amount:
Dealers choice here, pick any of the amounts from the 3 questions. I started with $100, then upped it to biggest payment then upped it again to a full month of expenses.
Paper cash
Purpose: Money set aside for scenarios restricting access to bank accounts. We keep a small amount of paper cash in a small home safe in case of identity theft, or power outage scenarios where we may not have access to our credit and debit cards.
Questions:
*What 3 scenarios are most likely to result in power outages in your area? (Floods? Earthquakes? Tornados? Winter storms?) How long does it typically take to restore power after? (multiply by regular expenses that was estimated above)
*According to Credit Karma, it takes somewhere between one day to one month to resolve most identity theft issues.
To Calculate Paper Cash Fund Amount:
Dealers choice here, pick any of the amounts from the 2 questions that you feel most comfortable with.
Start Small
If you are feeling overwhelmed right now after reading all this, don’t worry. You can and should start small and build from there.
For example, the first time I sat down to plan this out, here is what I decided I needed to save:
My Initial Fund Amounts:
$950 Death Fund
$0 Job Loss Fund
$0 Common Shortage Fund
$0 Minimum Balance fund
$0 Paper Cash
————————————————————————————————
$950 Total (Rounded to $1000 for ease of tracking)
Overtime I added the other funds and increased them bit by bit. After I hit the first $950, my next goal was $2000. After that I had some momentum in saving so I increased it to $3000.
Fourteen years later, plus husband, plus house, my/our emergency fund looks like this:
My Current Emergency Fund Amounts:
$10,000 Death money
$6,000 Job loss fund (4 months of bare minimum expenses)
$5,000 Common Shortage Fund (the out-of-pocket max for my insurance)
$1,500 Minimum balance fund (1 month of bare minimum expenses)
$1,000 Paper cash
————————————————————————————————
$23,500 Total
That seem like a lot?
Let’s do a quick reasonableness check. If we were to follow most financial experts advice of 3-6 months of expenses, we would need to have between $9,999-$19,998 based on $40,000 per year of total spending. So we technically have a little more than the common recommendation but we aren’t too far off.
What’s the point of doing all this work if I can just use the 3-6 months calculation?
Well you could. But what has really helped me to save and keep this emergency fund is that it is specific. When I got weary of working tons of hours and saving everything, I thought about quitting and then remembered the scenario of my baby brother laying in a hospital bed and that helped motivate me to keep going.
Once the money was saved, thinking of that purpose helped me keep my hands off of the money when I thought about using it for things that are less serious. If you do decide to go with a $1000 or 3-6 months fund, I still recommend outlining what the money is and isn’t for and identifying the specific “WHY’s” behind each dollar.
The more specific you can be and the more “Why” and purpose you have behind every number, the better off you will be.