Is Three to Six Months of Expenses Enough Money For Your Emergency Fund?

This year, my main financial resolution or goal is to fully fund my emergency fund.  At first, I arbitrarily picked the amount of $10,000 as my goal.  But, is that enough?  Recently, I sat down with my wife, created a budget, and then seriously looked at what we needed to save to reach our goal of three to six months of expenses saved in our emergency fund.

Just Essential Expenses or Everything?  Lets face it.  Emergency funds are for emergencies only!  When finally getting around to establishing a funding level for our emergency fund, my wife and I took a long hard looked at our monthly budget.  If, God forbid, the income earners in your family loose their jobs, you will pay just the essential expenses and suspend the rest until you can afford to start them back up again.

For my wife and I, our essential expenses included items like our mortgage, car loans, childcare (may be optional depending on situation), groceries (not eating out), property and life insurance policies, gas, electric, water, etc.  Items that we would suspend in a time of need would be retirement savings, any other investments, college fund savings, luxuries like cable television and internet, vacation funds, sports and activities, and other nonessential things. 

Three Months or Six?  One rule of thumb that can be used to determine if you need to save three or six months worth of essential expenses is how safe your job is.  How likely are you to get fired or laid off?  That might be a little easier said than estimated in today’s crazy economic times when there seems to be new headlines of massive corporate layoffs everyday.  Even government jobs and other recession resilient jobs are under threats of potential layoffs or furloughs.  You might be better erring on the side of caution.  Maybe we should all strive to save a full six months of essential expenses in our emergency fund.

So, you may be wondering how my $10,000 guest-amate (guess + estimate) went.  When I added up all of my family’s essential monthly expenses, it actually equaled $3,400 a month.  I was blown away!  I could not believe that so much of my monthly income is dedicated to vital expenditures.  So, my $10,000 goal only roughly translates to a three month cushion.  I would need about $20,600 for a full six month emergency fund.  I’m not sure whether now knowing actually gives me any comfort.  I’m actually a little depressed with this realization, but I guess that forearmed is forewarned.

Tagged as: Emergency Fund