How Much Money Should Be In Your Emergency Fund?

We've talked about the virtues of having an emergency fund. However, as finance blog The Simple Dollar highlights, money in an emergency fund is money that's not in your investment portfolio. So how much should you keep in it?

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The Simple Dollar explains that emergency funds are designed to be liquid assets (money you can access quickly), so they naturally make bad investments. This is OK and, by itself, it's not something to worry about. Determining the portion of your money that should be in an emergency fund gets trickier though:

Right now, our emergency fund makes up only a few percentage points of our net worth. Even when we first started our financial turnaround, we only established a $1,000 emergency fund, which was still only a small fraction of the total value of our assets.

An emergency fund is simply a sacrifice of returns on a small portion of your money so that you have something on hand that's very liquid and very low risk. It's not meant as a major part of your retirement savings or your investment strategy. It's meant as a buffer against things that might happen to you.

How do you determine how much of your cashflow ends up in an emergency fund? Do you use a percentage of your income? A set dollar amount based on your expenses? Or do you go with a flat $1000 or so? Tell us about your strategy in the comments.

Is an Emergency Fund Necessary? [The Simple Dollar]


Comments

    Given the job climate in my industry (communications - where most of the work is being sent to China/India), I try to keep 6 months of general expenses to be sure that I can last without crisis until I can find a new job should I be made redundant.

    We used to always keep at least 6 months worth of Mortgage payments in a separate account, We figured that the chances of us both losing our jobs at the same chance was slim to remote (we work in very different industries) so at least if one of us suddenly got laid off the others wage would still keep food on the table, bills paid and the lights on while the Mortgage would still be taken care of by our backup account. Since neither of us lost our job we have put even more money aside and changed to a mortgage offset, so now that money is working for us reducing our mortgage, but we can still access it very quickly should we need to in an emergency.

    You should be able to last for at least 6 months without any new income, covering all debts, bills, utilities and basic essentials such as food and some petrol. For me, this would amount to about $35,000-$40,000, but ideally you want to have a bit more than that, say $50,000 just in case things go from bad to worse. I am currently out of a job and have been for the past 2.5 months without any income, and with a mortgage and two other mouths to feed. We are operating our expenses on a need-to-buy basis, and do not drive unless we absolutely need to, aiming to get the most out of that drive each time. I dont know when my next pay packet will come, as the market is not looking good. The other day I applied for a job that was advertised the day before at 6.15pm. My application was sent through at 10am the next morning. In less than 24 hours, the recruitment agency received over 100 applications for that one job and are now going through them one by one. Its a scary position to be in.

      Wow 40k in expenses for 6months. The joys of supporting a family I imagine. All the best with your job search, there's a lot of us in a similar boat unfortunately.

        @matt0, thats not to say that i will be spending $40k in 6 months, its what I would keep to ensure my family and I could live comfortably for a minimum of 6 months. Edit: Thanks for the wishes btw.

        Last edited 19/02/14 4:44 pm

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