How much should I keep in my emergency fund? It’s tough to answer, changes over time, and is different for everyone.
In this post, I’m going to share questions you can use to set your emergency fund goals.
For everyone who doesn’t know me, I’m a traveling CPA with a passion for physical and financial health. I help busy people keep their bank accounts fat and their bodies strong.
Online Confusion
If you’re online at all, you’ll come across a million opinions on how much money you should keep saved. Some people say to put almost everything in the market to maximize returns. If you’re under debt, people tell you to pay it down first and worry about saving later. Others will tell you to dump money into retirement accounts to take advantage of tax benefits.
All of these ideas have truth to them. It makes sense to attack high interest debt so you don’t overpay interest. It also makes sense to invest in stocks so your assets grow and beat inflation.
That said, everyone can agree that you need SOME cash in the bank for living costs and emergencies.
Here’s three questions my wife and I asked ourselves to decide how much cash to hold.
- How much do we need to spend each month?
- How many months do we want to be able to coast?
- Do we care more about stability or growth?
Monthly Burn
The first thing to understand when you’re building an emergency fund is how much your monthly spend is. That’s the amount you and your family need to spend each month to live.
Think: food, rent / mortgage, utilities, car, insurance, stuff like that.
If you can figure out that number, including a monthly cushion for random expenses, then you can plan how much to save.
Don’t ignore money for fun stuff too. Make sure you let yourself have some money for a night out, round of golf, something fun that you can enjoy. If you’re ever forced to use your emergency cash you’ll probably be in a tough spot and need a bit of fun.
How Long To Coast
After you figure out your monthly number, figure out how long you want to coast. For some people 3 months is enough. I’m more conservative and want to be able to coast for at least 12.
The reason I save for this long is simple: to protect from the worst case scenario.
I want to be ready in case my skills become obsolete and I need to re-train, ready in case a major personal catastrophe strikes, ready in case I need to leave my job for some reason.
The size of my emergency fund gives me the peace of mind that my family and I are safe in case something crazy happens.
Talk this over with the important people in your life and figure out how long you need to be able to coast. From there, multiply the months by your monthly spend and you’ll have your savings number. Then all it takes is a little discipline to fill up the fund every paycheck and buy your peace.
What Do You Care About
Finally, make sure to understand what you care about the most. If you want peace of mind, like me, then build up a large fund to protect you.
If you’re more risk taking, save less and put more cash in the market.
In other words, you decide how much to keep saved.
If you save a smaller amount, you’ve got more money on hand for riskier investments. BUT, you might not be fully prepared if something bad happens.
If you save a larger amount, you’ve got peace of mind that you are safe if something bad happens. BUT, you’re not going to make as much money with investments.
This is where the ‘personal’ part of personal finance comes into play. The math always says investing in the market and minimizing cash on hand is better.
When you factor in life satisfaction, emotional security, and risk it sometimes makes more sense to have more cash on hand than the math would recommend.
Quick disclaimer: This is not financial advice, I don’t know your situation, I only know what helped me with mine.
Until next time,
Fit and Finance