A Fully-Funded Emergency Fund
Spend any time learning about personal finance and you’ll soon come across the idea of a “fully-funded emergency fund”. But what is that, exactly? The reigning experts all give different answers, stating that a fully-funded emergency fund will cover anywhere from 3 months to a year or more’s worth of expenses.
So who’s right?
Well, as the saying goes, personal finance is personal, and that means that you are the one who decides whether or not your emergency fund is fully funded. After all, you’re the one who has to live with the potential consequences of having too little or (rarely) to much set aside in case of emergency.
The expert opinions are useful in that they can be looked at as a starting point or a rule of thumb, but beyond that, it’s your life that you have to take into account.
Things to consider
First, think about exactly what you want your emergency fund to cover. Will it be for job loss only, like ours is? Will it be for things like car repairs and medical expenses too? The more things you consider an emergency, the bigger your fund will need to be.
Since most emergency funds are in place to keep folks going in case of job loss, you should also think about how much of an impact losing your job could have. For example, are you the sole income-earner? Or do both you and your spouse work at the same company? Are unemployment rates high in your area? Do you have extremely specialized skills? If any of those are true, you’ll want to beef up your fund even more because you could potentially end up with no income for an extended period.
Figuring out the amount
Once you’ve decided what it would need to cover and thought about a few worse-case scenarios, it’s time to come up with a dollar amount.
The dollar amount you decide on should be based on your average monthly expenses, plus anything else you want it to cover. Don’t make the mistake of assuming that you’ll cut back dramatically in case of unemployment, either. (Realistically, you probably won’t, at least not at first.)
Come up with your target amount based on that, and then start socking away money until you reach that goal. It may take some time to get there, but having a safety net will be worth it.
I believe having a comfortable emergency fund that will cover all normal expenses will reduce the stress that just the emergency situation will cause. Even having extra would be the best. It’s not always easy but well worth it once it is established and waiting.
Oh there’s no question, it reduces stress immensely :)
I have never, ever, been good at this!!!
There’s always time to change ;)
Since my emergency fund is for job loss I base it on minimum expenses needed to get by. If I lost my job I’d be cutting back like crazy and wouldn’t be using my normal monthly expenses as we would stop eating out etc.
I tend to figure mine both ways — how long it would last if I went with bare-minimum expenses only, and how long it would last at my current rate of spending. The reality for me is probably somewhere in between.
Thanks for the reminder. I need to rebuild my emergency fund this fall!
Why wait? Start now :)
I have a stair step emergency fund: 1,000, 2,500, 5,000, 10,000. Then I’ll invest.
Sounds like a great way to go about it! I may have to steal that term :)