As we continue to build our family emergency fund, I often think about what is the right amount. For the longest time I’ve heard from financial gurus you need to have a minimum of 3 months and possibly up to 6 months. We’re now hearing 9 months up to a year since the economic crisis where thousands lost their jobs.
Why have an emergency fund?
The abscense of an emergency fund puts you at great financial risk if you were to lose your job. I’m convinced that no job is 100% secure no matter your skill level, relationship with the company and how well you perform. No one can control economic down-turns or shifts in company strategy that can leave one jobless. Believe me, I know as I was laid off about three years ago.
An emergency fund also helps protect against Murphy as Dave Ramsey says. In case you don’t know, Murphy comes from Murphy’s law. According to Wikipedia Murphy, or Murphy’s Law is an adage or epigram that is typically stated as: “Anything that can go wrong, will go wrong”. So, when that thing does go wrong (and it always will) you need to have emergency savings to help protect you from debt or the use of credit cards.
How much emergency savings do you need?
So, back to our original question. How much emergency savings do you need? I came across an interesting article from Sound Mind Investing discussing challenges with saving before investing. The article wrestles with a common problem. You spend your time and effort to build savings before investing and then an emergency occurs and you have to start over. Will you ever get to the point of investing? It can be simply frustrating sometimes.
What I liked about the article is that it asks the question: “Is all this caution about having an emergency fund really necessary?” Certainly, we can all agree an emergency fund is necessary, but to what degree. Afterall, there is a solid argument you could end up saving for (and rebuilding for) emergencies forever without getting your retirement investing started.
Sound Mind Investing suggests building an emergency fund reserve of at least $10,000. I think this is an excellent approach because it gives you some freedom to make some choices at that point while also having some good protection against Murphy acting up.
What’s your risk tolerance?
With $10,000 saved you can then decide how much risk you’re willing to take (it’s different for everyone). As I mentioned above, no one’s job is secure. We could all be unemployed tomorrow. But some people certainly have more risk associated with their work than others.
So, what are those risk factors you need to consider before deciding how much to save towards emergencies? You might have more risk and need more savings if…
- You are a one income family
- You have children
- You have known health problems in the family
- Your employed by a small company in a volatile market
- There is a larger financial expense on the horizon such as medical or new baby
- You’re not getting good performance reviews at work
- Your company or department is making a lot of strategic changes
- The economy is down
- Your marital relationship isn’t strong
- You have elderly parents who are in retirement and need additional help
As you can see, these risks are definitely things that many of us can relate to and are a part of life. They are all risks that could turn into issues which require contingency money to fund. It’s up to each person to weigh these risks and determine the right amount of emergency savings.
Hint: for just a consistent savings of $19.23 a week you can build an initial $1000 emergency fund in 1 year! Most people can find $19 per week, so get started!
How much emergency savings do you think you should have?