How Much Do You Need in Your Emergency Fund?

I’d like to tell you a story about the worst year and a half of my life. And yes, before you start to wonder, it was the same year and a half that was everyone else in the world’s worst as well. But for me, it was an entirely different reason.

It all began in February of 2020. Valentine’s Day, to be exact. I came home from work to flowers and a card from my husband, with plans to order Thai food and enjoy an at-home date night after our 10-month-old twins went to bed for the night.

Instead, I was greeted by the news that he had been fired from his teaching job. It wasn’t for anything egregious or scandalous, just a lack of patience he had with students and a propensity to raise his voice. But still.

That moment kicked off what was the most stressful and anxious 19 months I’ve ever lived through. He jumped from job to job, working at a big-box store, driving for Amazon, and selling insurance, to name a few. While they brought in much-needed money, they also were low-paying, exhausting, and ended for one reason or another.

Honestly, thank God for those stimulus checks through the pandemic. While we never fell behind on bills, wracked up debt, or defaulted on any payments, that money gave me the peace of mind and financial cushion to alleviate some of the stress and upheaval throughout the many, many job losses and transitions.

But since August of 2021, he’s had a pretty stable job, one that pays well and seems to be going well (I’m keeping my fingers… hell, and my toes, crossed).

The lesson that I learned from those awful months was the importance of an Emergency Fund.

We all know that life is going to throw curveballs at us. The job loss will happen, the hot water heater will need replacing, and an unexpected emergency room visit results in a huge bill we didn’t anticipate. Sometimes, that happens all in the same week.

Instead of having to respond each time an unexpected life event and expense comes up, we should know that they’re going to happen eventually and anticipate it. Then, plan ahead.

How Much Should I Have In an EF?

In all the reading I’ve done on this, there is generally a consensus from all the big names in personal finance that you should have between three to six months of living expenses saved in a liquid account.

Keep in mind that your three to six months totals are entirely personal and depend on your expenses and needs. We’re aiming for closer to six months, and there are a few reasons for this:

  • My husband’s job history has proven to be volatile. Having a bigger cushion allows me some breathing room for those unexpected job losses and the time it takes for him to get another job.
  • We have kids. That means our expenses need to include what we need to continue to provide for them. This includes medical bills, shoes, and clothing.
  • I can be an anxious person and having more of a cushion is good for my peace of mind.

We looked up a simple Emergency Fund Calculator to get an idea of a good number. I like this one from Nerd Wallet that helps you add up your basic monthly expenses and come up with a total number to aim for. Remember, that those three to six months as basic living expenses (i.e. not manicures or online shopping binges).

We also then discussed what we felt comfortable with in terms of how much we wanted to have on hand. You can be really conservative and aim for eight to twelve months invested, but you also have to realize that those funds lose purchasing power over time thanks to inflation. Any money over our six month amount is something we want to invest in order to see more gains in the long run.

Where Should I Keep My EF?

The number one rule of your emergency fund is to keep it liquid.

What does this mean? Well, this money should definitely not be invested. You only need to take a look at the recent market activity to understand why. Obviously, we never know when an emergency may hit and the last thing you want to do is to pull money out of the market when it’s down. When you do that, you realized the losses and can’t recover that unless you put that money right back in.

We keep our funds in a High Yield Savings Account (HYSA) through Barclay’s (not an ad, just a fact). Currently, we only earn 0.90%, but the point isn’t to grow this money but to keep it safe to use as needed. When we need it, we can transfer it to our main account in about a day.

What Constitutes An Emergency?

An emergency fund is there to be used in case something unexpected and unforeseen comes up that you couldn’t anticipate. Use your emergency fund for expenses like medical bills from a visit to the ER, replacing your furnace when it can’t be repaired, or paying to fix your car if you get in an accident.

If you KNOW that you have something coming up, don’t plan on using your emergency fund. If it’s something you can predict, then it’s not an emergency, pure and simple.

Instead, create sinking funds to save in advance for those items. Some common categories for sinking funds can include car maintenance (such as new tires, oil changes, etc), medical procedures you schedule in advance, and anticipated home repairs and updates.

Time for Action: Start An Emergency Fund Today!

If creating a cash reserve of six months seems daunting and impossible, don’t stress. I get it! Instead, focus on smaller goals that you can accomplish in the near future. Start by opening an HYSA and automating an amount you can budget towards your EF to be transferred each month.

Aim to start small: just one month at a time. Once you accomplish that goal, focus on adding one more month, bit by bit, until you reach that final number.

And if you need to use some of that money? Great! That’s what it’s there. Then, replenish it and keep going so you don’t have to rely on getting into debt and using credit cards.

Tell me below, where are you at with your EF? If you haven’t started one yet, what can you do to take an action step today?

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