How Much Should I Keep in My Emergency Fund?


An Emergency Fund, also known as a Rainy Day Fund, is money set aside to be used when your typical income cannot cover extraordinary events and/or your income is reduced to a level such that funds are needed to cover your basic living expenses.  An Emergency Fund is neither your retirement money nor your investment account; it is money held safely away in a low risk account.  Your Fund should not be invested as it should be held in an account that allows you access to the money quickly and not subject to the volatility of the markets.  For those individuals without significant resources, it is the first place where savings should be deposited; for those individuals with resources, it may simply be used as a buffer, allowing other assets to be converted to cash on a reasonable timeline, rather than the necessity of a fire sale to raise cash.

Most everyone understands the need for an Emergency Fund and why financial planners view it as a foundation of a properly developed financial plan. However, many question how much to stash away in the account.  The traditional rule of thumb states that an individual or family should maintain an Emergency Fund with three to six months of living expenses.  To determine how many months are in your Emergency Fund, simply take the dollar amount set aside for a rainy day and divide it by your monthly living expenses.  Note that living expenses, for purposes of an emergency fund, include needs, not want, such as mortgage/rent, food, electricity, etc., and not the wants like your season tickets to the Miami Dolphins or your next vacation.

So how much should you have in your Emergency Fund?  There is no easy answer – your personal situation will determine the amounts.  Following are some examples that can either increase or decrease the suggested amount to tuck away:

  • Marital Status/Dependents- the more people that rely on your income, the greater the amount should be in your fund.
  • Dual Income- If you and your spouse both have income from different sources, the amounts recommended decreases.  Having diversified sources of income could act as a hedge against job loss for one of the people in the relationship.
  • Stability of Income- The reliability of income sources directly affects the size of the fund.  Consider the different needs of a 20 year civil service veteran as opposed to a commissioned salesperson.   The salesperson would have a much more likely chance of a period of reduced income than the civil servant and thus a need for a larger fund.
  • Access to Other Avenues for Fast Cash- Indirect relationship – If you have accessible avenues to funds to be used in critical moments, the amount kept in an Emergency Fund might be decreased.  Some examples include an untapped home equity line, no waiting period on a short-term disability insurance policy, and even use of a credit card.   However, one must realize that home equity lines and credit cards may lead to debt problems and should only be used to allow time for your other assets to be liquidated on a reasonable time line – as opposed to the fire sale.

Rules of thumb are a great place to start for measuring your ability to combat an unexpected storm or other emergency.  Think carefully about your situation to determine the appropriate amount to keep in your Emergency Fund.  Remember, no one plans to fail, they simply fail to plan!

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