how much emergency fund is enough?
The term “emergency fund” is misleading. Is a new tire for the car an emergency? Is a new TV, when your last good one dies? Most of us have a good idea what an emergency means when we consider the extreme case: a sick child, a roof with a gigantic hole allowing the rain to come in, a car that won’t start. When you get to the more “iffy” emergencies it gets a bit tougher. Is it an emergency when you need a new dryer? I mean, you COULD hang clothes out to dry for a while.
I’ve read many times that you should have $1000 in an emergency fund, or that you should establish a three month or six month or eight month emergency fund before investing. Should you start thinking about Roths versus traditional IRAs as soon as you have $1000 in an emergency fund? Should you even be thinking about paying down your credit card debt that quickly?
We just went through seven months of a “zero-income” household, although we did have a few sources of alternative income. Neither my wife nor I were working jobs or earning money in our fields, and although we had to tighten our belts to a small extent, we were able to live more or less normally the entire time. Why? Because we had an enormous “emergency fund”, equal to more than a year of expenses.
I know there are people who can live on the razor’s edge, dancing around on margin and leveraging their next income-generating venture. If you’re that type of person, more power to you. I’m not. I’ve been able to rest easy and take my “mini-retirement” thanks to saving whenever we could in our emergency fund. It’s a lifestyle choice, but I’d argue that if you’re the type of person who gets nervous when the money runs out, you’re better off having an adequate stash laid by when times are good. When times are bad, you won’t be sorry you have enough – or even more than enough – saved up.
The argument against this might be that you can’t build wealth by keeping your money in cash (or “almost cash”). You need to put that money to work. True – but nothing is more of an impediment to building wealth than hitting a hard patch that causes you to go back into debt. In this economy it can happen quickly, and the length of time without income can be extensive. Nothing would derail your future prosperity worse than going into debt during a sudden but protracted unemployment.
So think twice before accepting the idea that a three-month or six-month emergency fund is enough. It’s never really enough. I’d love to have a three or four YEAR emergency fund. Cash in the bank is, well, cash in the bank.
photo by Paul Keleher
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My wife and I are looking at buying our first place, but cashing in that pile of money we have as a down payment is really going to hurt. We're so stress free because we know we can deal with anything coming our way. Without that huge pile of cash though….things change.
I have been hearing mixed thoughts for awhile. Everyone has an opinion. But when should you start? It's easy to say as young as possible, but there are other things to consider. For example I have no other financial responsibilities other than myself. sure having an emergency fund is great, but I also love to travel, and the trips are expensive. I would rather save for a big trip and have a once in a lifetime experience than have an emergency fund right now. Sure it is also used as an emergency fund for example when my car needed repairs, but it's not the main cause. So when's the right time?
I'd like to have a 50 year emergency fund! That would be the right amount…
I've always felt you should have the equivalent of a year's worth of net income…and then some, since you'll need enough to cover health insurance if you're out of work.
And Craig…the right time is right now. Youth, alas, is no armor against misfortune. A friend of my son's was sideswiped by an RV while he was riding his motorcycle to work. Didn't do his body any good…lost his spleen and a kidney and had a lot of other serious damage. Took several months before he could go back to work. As it developed, his employer hadn't been paying the employer's share of the health insurance, and so our guy was uninsured! He and his new bride had just bought a house. So now they're pauperized and he may never be fully healthy again.
First stash an emergency fund. Then stash vacation funds.
I keep about 2 years of an EF.
I'd like 3 years, but I need a contract to build that up. *shrug* Am not worried about making money as I do have that money saved, and I do live on very little and could pick up a minimum wage job if I wanted to pay the bills.
I say have two buckets of money: emergency and fun bucket
I say have two buckets of money: emergency and fun bucket
I keep about 2 years of an EF.
I'd like 3 years, but I need a contract to build that up. *shrug* Am not worried about making money as I do have that money saved, and I do live on very little and could pick up a minimum wage job if I wanted to pay the bills.
I say have two buckets of money: emergency and fun bucket
Thanks for sharing such great post, according to me there are numerous reasons when we need such emergency funds. By building an emergency fund you will feel more secure because you are prepared for the facing any financial crisis. For more details on emergency fund refer http://www.prime-targeting.com/guidelines-for-b...