You’ve all heard that you need an emergency fund to pay for all those unexpected bills right? But how much money do you actually need in it? Fortunately it’s not as much as you think.
But let’s be clear right off the bat. I’m talking about the emergency fund that you dip in and out of during the year to pay for things like a new washing machine when your old one starts flooding the laundry, NOT the one you need for a backup plan in case you lose your job (but I’ll still talk about that one later).
So Basically Yes, there are two types of emergency funds.
With that in mind, how much money do you need in an emergency fund? Well each of them is different, so let’s start with the first. It’s the easiest to set up and the one you will be using the most.
The Everyday Emergency Fund.
You’ll need $2,000.
Yes the average family finds that over the course of one year, they have about $2,000 in unexpected expenses that they haven’t budgeted for.
That’s a lot of emergencies.
How to build it up. I suggest getting a savings account set up that you can access easily and preferably linked to your everyday account so that you can easily transfer money in and out of it. Right now interest rates on savings accounts are pretty dismal, so go for ease of use rather than a high interest rate.
Each month add as much money as you can to build it up to $2,000. The faster you can get to that amount the more secure you’ll be for those emergencies that crop up.
Once it’s topped up then just leave it until you need it. Only use it when you absolutely have to though, remember it’s just for those expenses that you absolutely need in a hurry if something bad happens, not everyday expenses. Then when you do use it, top it up again for the next time.
If you are anything like the average family you’ll probably need to dip into it around two or three times per year, so use the other times to keep it topped up to the right amount.
The ‘Oh Crap I Lost My Job How Am I Going To Pay the Mortgage’ Emergency Fund
Now THIS emergency fund is a little more complicated because it’s going to be different for every person based on what expenses they have on a daily basis (rent/mortgage, bills, food).
If you’ve done a spending detox then you know how much you need to live on for the basics so that can be your guide.
Ideally you want about twelve months worth of income to cover your expenses for those times when you have no income coming in. It doesn’t have to be a full salary though since you won’t be spending as much if you are not working – right!?
If you haven’t done a detox yet to work out what you need each month and what you can live without then a good rule of thumb is about ½ to 2/3 of your regular salary. So if your current combined household income is around $80,000 annually, then you’ll need around $40,000 to $50,000 in this emergency fund.
Sure that sounds like a lot. But you should aim to build this fund up over the course of five or so years. Knowing that you need to save $5,000 or $10,000 a year sounds much more doable than trying to do it all at once.
Once you’ve build this fund up you need to put it away where you can’t easily get to it and be tempted to use it. I still prefer a savings account over a bond though, just in case. It’s likely that you many not even need to use this account, and I sincerely hope you don’t, but it’s a good buffer to have if the worst happens and you do lose your job (or your partner does). It allows you a good year of breathing space to find a new job or source of income.
So there you go. The emergency accounts that you need for financial security and the amounts that you should have in them.