What’s the Minimum Emergency Fund You Should Have?

I’ve been asked several times “How much money should I have in my emergency fund?” Many people have heard that it’s best to have $1,000 in an emergency fund, but this amount isn’t enough to cover emergencies for most families.  You see, having an emergency fund is like having an insurance plan for unexpected expenses.  Does an auto insurance plan with only $5,000 in liability coverage do you much good with the average new vehicle costing over $28,000?  Of course not.  That’s why most people have liability coverage of $25,000 or $50,000.  We don’t plan to total someone else’s car, but we have a plan just in case we do.

I wish there was a magic number for an emergency fund but there isn’t, because every family’s circumstances are different.  I can tell you several things I look at to determine what amount is best for my family..  That is present tense- because our emergency fund may need to change from time to time depending on life.

1. How many salaried full time wage earners are there in our family? When both of us were working full time we kept less money in our emergency fund because there was less risk of losing all our income. In times when one income was full time and one was on a contract basis we kept more in our fund.
2. Are we expecting any life changes that will effect our income or spending?  In the past 11 years we’ve had several situations that caused us to cut expenses so we could stash more in our emergency fund until we were sure our budget was intact:

• My husband was in grad school full time
• We bought a house
• My husband was diagnosed with cancer and spent the next 5 months undergoing treatment.
• I resigned from my first teaching job to stay home with our foster kids
• I went back to teaching a year later, but my husband cut his hours to part time to finish grad school, and then resigned his position to stay home with our foster kids
• My husband began contract work in his new field of work
• Our son was born (and had eye surgery 6 months later)
• Our daughter was born and 6 weeks later we moved to TX. So I resigned my teaching job and haven’t gone back, leaving our emergency fund healthy
• We have insurance, but what are our deductibles?  We don’t want to have an insurance policy but not have enough money to cover the difference in the deductible if we needed to use it.
• How much would it cost to replace major appliances in our home? Making small claims on home owners insurance tends to make your premiums go up and your likely hood of being insurable go down.  I know may people who have made 2-3 small claims ($1,000-$4,000) over several years and either had their insurance cancelled or found that no other company would insure them when they went to buy a new home. Typically a AC unit is the most expensive thing we’d replace without making a claim, so I usually count that amount when considering our emergency fund number.
• What are our basic expenses each month?  When I look at all our bills I make sure we have enough in our emergency fund to pay at least 1 month’s worth of bills and expenses. Usually we keep 3 or 4 months worth.  That’s enough time that we could find a temporary job if it was necessary to cover us in the event of a job loss or major unexpected expenses.

For us, the minimum emergency fund is 1 month of home owner’s insurance deductibles on both our homes.  The chance of having to pay auto deductibles, home insurance deductibles and having a job loss all in the same month is extremely slight.  Any one unexpected expense would fall well within the amount of the home insurance deductibles.  In the event of job loss that amount would cover us for about 6 weeks. On the upper end, there have been times we kept up to 6 months of full expenses because there were so many uncertainties in our future and more risks involved with them.