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Emergency Funds – How Much is Enough?

One aspect that personal finance preachers always talk about is having emergency money on hand.  The purpose of having accessible emergency cash is so that if you run on hard times (ie. if you lose your job, or your roof starts to leak), you'll have cash on hand to cover expenses.  The key question is, how much is enough?  How much should one hold in an emergency fund?

I've read around, and a lot of people say to have at least enough cash to cover 3 months to 1 year of expenses.  So say that you have around $3k/mo in expenses, according to that rule of thumb, you should have anywhere from $9k -> $36k sitting in a bank account somewhere.  In my opinion, the amount that you have in your emergency fund is purely a personal choice and should correspond to what you're comfortable with.  

For me, since I'm pretty frugal (hence the name), I tend to have some cash on hand.  However, I also have the tendency to spend the cash if a good investment opportunity comes up.  The last time I spend a large portion of my savings was when I purchased a rental property, the deal was too good to pass up.  So what if I needed cash during that period?  I had a line of credit to fall back on, which would have been enough to cover the worst case scenario. 

So maybe a better approach would be to ask yourself, if the worst case financial scenario happened right now, how much cash would I need to sustain me and my family?

How do you determine how much to keep in your emergency account? 

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 42 comments… add one }
  • The Financial Blogger August 8, 2007, 7:48 am

    I know it is a big lack in my financial planning, but I do not have emergency funds. There two reasons why I do not have any. First, we just bought a house a year ago and we have 2 little kids so cash flow is running out. Second, I already have about 15K available on a line of credit if I need any money. I also have the opportunity to pay interest only on all my debts (I only have the all-in-one) so my monthly payments could drop significantly if I ever lose my job.

    However, I must admit I would like to have about 10K in cash for the “just in case”.

  • oOKitijimaOo August 8, 2007, 10:09 am

    Everyone’s situation and goals are different, but if you want a generic answer, most experts say you should have 3 to 6 months of liquidity on hand. Anymore then that then your money is not really working for you and anything less then that is really a shortfall for emergency events like fixing the roof on your house or your basement leaking, losing a job…etc.

    I hope that helps.

  • FourPillars August 8, 2007, 10:29 am

    Zero. I have plenty of debt that I can pay off with any cash I might have. I also can access to plenty of credit should I need it.

    Mike

  • Q Cash August 8, 2007, 11:04 am

    I have about 10K at anyone time in cash if there is an issue, but I also have access to line of credit it is an issue.

    When I was trying to eliminate debt, I kept no cash and just kept paying down debt. The downside of that was when I did need cash, I had to increase my debt again (but only for a short while).

    Q

  • Moneydork.com August 8, 2007, 11:33 am

    My family keeps $500 cash in our house in a safe for tier 1 emergencies (i.e. bail money…just kidding). Then we have $5000 in our emergency savings which is seperate from our traditional savings which is used to long term savings goals. That’s about 2-3 months worth of living expense which is fine for us.

  • blogger August 8, 2007, 11:43 am

    I have always maintained 10-40k reserve cash, and was recently inclining towards investing all of it and get a LOC for emergency; though I missed the option that a buying opportunity might arise and I might not have any credit/cash left with me.

  • Canadian Dream August 8, 2007, 11:53 am

    I’m another zero emergancy savings. I keep a LOC of 10K for that and I tend to run with enough extra cash in various accounts to cover most problems that come up.

    CD

  • Daniel M, August 8, 2007, 12:09 pm

    Like most here I have a very small amount of cash on hand because of our goal to eliminate all “bad dept” as fast as possible.

    We have 15k in lines of credit that we are not using because it is at a higher interest rate and we could count on that for fast cash in small or moderate amounts. I’m not sure that all the credit would be available if my wife and I lost our jobs.

    At this point we’d have to rely on EI or our RRSP’s to cover our needs until employment resumed.

  • Gates VP August 8, 2007, 12:29 pm

    oOKitijimaOo: if you want a generic answer, most experts say you should have 3 to 6 months of liquidity on hand. Anymore then that then your money is not really working for you and anything less then that is really a shortfall for emergency events like fixing the roof on your house or your basement leaking, losing a job…etc.

    And I think that FT is one step beyond that right now. You see, that “generic advice” misses so many things and makes a lot of assumptions. I mean if you’re near retirement and you have 1 mil in the bank, then what’s an emergency? I mean if it costs 5k who cares? You just cash out some of your RRSPs (which are all in securities b/c you’re about to retire) and then just go on with life.

    I bore it down elsewhere to five key questions:
    1. Do you have family support nearby?
    2. Are you eligible for Employment (or Unemployment) Insurance?
    3. Can you live off of EI/UI?
    4. How tough is it to replace your current job in your region?
    5. What are your insurance deductibles?

    You see, the nature of “Emergency” varies but the basics are all the same. Insure for financial hardships, if you own a home and that home burnt down, you’d be in a tough way, so insure it, same deal for auto liability. Now if you have a $2000 in deductibles between those two (auto & home), then make sure that you have $2000 on hand (savings account?) in case your home burns down on the day you lose you job.

    By the same measure, if you lose your job, how much financial hardship is that? If you’re eligible for EI (here in Canada), you’re collecting in 6-8 weeks. Can you make you make the bills on EI alone? If you can, then you only need maybe 2 months of “EF”. For some people, LOCs or CCs count as a ready EF and for some their job is highly replaceable, which is not the case for everyone.

    Of course, in your case “emergencies” like leaking roof and basement don’t actually qualify as emergencies to me. That’s just regular home maintenance. If you own a place, you should be socking away money every month for upcoming home repairs. Same deal if you own an out-of-warranty car, don’t wait until you have a problem, put aside 100-150/month (savings account?) so that when the car needs repairs (and it will) that you don’t wreck your budget to fix it. At the worst, when the car finally bites the dust, you’ll likely have money left over in the “repair fund” to help pay for the next one.

  • FrugalTrader August 8, 2007, 12:37 pm

    Another great comment Gates. Some food for thought for me.

  • FourPillars August 8, 2007, 1:46 pm

    Good comment Gates – another point is severance pay. Knowing that I will get 8 months+ of pay if I lose your job changes things quite a bit.

    Mike

  • Bootsie August 8, 2007, 1:57 pm

    My husband and I don’t have an emergency fund either (we have an untouched LOC just in case). Also, our monthly expenses amount to less than one of our salaries (we have equal salaries) so should one of us lose our job, the other could foot the bill fairly easily until the other becomes employed again.

  • FrugalTrader August 8, 2007, 2:04 pm

    Bootsie, congrats on minimizing your expenses to the point of being able to live on one salary. That’s one of our goals also, but doesn’t look good with the new house coming. ;)

  • ThickenMyWallet August 8, 2007, 2:14 pm

    I have 3 months of take-home pay and then a LOC for another 5 months of take-home pay. Yes, I goto sleep at night thinking the roof will collapse…however, my justification is as a self-employed individual you may have to throw cash in the business from time to time so its a personal and business emergency fund.

  • Gates VP August 8, 2007, 2:20 pm

    Hey guys, thanks for the feedback. 4 Pillars seems to be doing OK (8 months!).

    Of course, I forgot to give a thumbs up to Money Dork on the $500 cash idea.

    I’ve had $500-1000 in cash in “safe place” around the house and I can vouch for how valuable it’s been. From “smaller” emergencies (cab fare) to bigger ones (rent cheque bounced for no good reason, paycheque was late, dog needs a vet visit on the long weekend and they don’t accept CC), having cash made life way easier.

    I like the CC EF, I’m actually using it, but I still keep some cash on hand in case the CC isn’t working.

  • oOKitijimaOo August 8, 2007, 2:49 pm

    Gates VP,

    That is why I said:

    “Everyone’s situation and goals are different,”

    However thanks for clarifying for everyone my confused msg. If we are talking about FT’s situation I can’t give him a liquidity amount unless I know fully his current situation. That’s why I gave him a generic answer.

    I hope that is more helpful.

    Kit

  • moneygardener August 8, 2007, 6:49 pm

    EMERGENCY FUNDS DON’T HAVE TO BE CASH ON HAND – I don’t believe in keeping emergency funds, as we have a significant unused line of credit and significant non-registered investments that could be liquidated on demand if things went to hell in a hand basket.

  • FrugalTrader August 8, 2007, 8:04 pm

    Wow MoneyGardner, you really feel strongly about the issue don’t you? :) As you can tell from the post, I have the same train of thought. I use my line of credit as my main source of emergency funds.

  • oOKitijimaOo August 8, 2007, 9:21 pm

    moneygardener,

    I am not to argue with your beliefs, but what if there are downturns in the market(which of course there is plenty of that these days…very volatile market as we are seeing) and you needed funds at the worst time and the markets are down?

    For LOC, it’s great to have as a backup. Same thing can be said with LOC when times are tough, so our prime is great only 6.25% now and you have a job that affords you to take on that debt, but what if you can’t afford those interest payments any longer or prime increases to 10%? LOC will create debt if you can’t afford to make the payments.

    I’m just saying saving for a rainy day is not a bad thing.

  • The Financial Blogger August 8, 2007, 9:27 pm

    I am glad to see that I am not the only one with nothing aside as an Emergency plan!
    I think credit cards (they have so many special offer on balance transfers!) and lines of credit can do the job. Even at 10%, your monthly interest payment would be $167 on 20K of debt. You should be able to find another job before you get to this level. This leads me to an interesting question: Do we really need an emergency funds or having 20K sitting forever into a GIC is good for financial advisors’ commission and banks’ profit?

  • moneygardener August 8, 2007, 9:35 pm

    My apologies for the caps…I just cut and pasted off my blog from a recent post that I did.

    Regarding selling when the market is down…I believe my portfolio is conservative enough that even in a strong market downturn I will be holding something that would not hurt that much to sell (ie banks, trusts, big divdend payers that just don’t fall as much, or I already have a good gain on something from the past and I was thinking of dumping it anyway). Of course this is a worst case scenario as I would much rather dip into a LOC rather than sell assets. I agree with FB that I would not be worried about finding another job over time….

    It is an individual thing. I just think our financial position is solid enough that I don’t need a security blanket earning low return and being eaten up by inflation.

  • nancy (aka money coach) August 9, 2007, 3:14 am

    To those who, like most Canadians I think, have little or no emergency savings:

    1. I have never come near the elusive 3 months, BUT, again and again, whatever I did happen to have saved up seriously took the edge off of something that fell out of the sky (thankfully, not yet my roof). I think sometimes setting such a high goal (ie. $10K) feels so impossible that we give up right from the start.
    2. Using LOC etc … the only thing is, that can sometimes lead to debt being the centre of our financial lives. For me, setting aside savings even while I had some debt, was a key turn-around for me. The debt yo-yo stopped, and I was able to permanently eradicate the debt in my life.

  • The Financial Blogger August 9, 2007, 8:55 am

    Nancy,
    I don’t think the 10K is the problem. The problem is most people want to have their house, their new car, save money for vacation, put some in RESP and max out their RRSP, put a lump sum payment on their mortgage and then, (once our dear Government took 40% of our salary) we have to put money aside for emergency purposes. It is getting pretty difficult when you are young!

  • oOKitijimaOo August 9, 2007, 9:21 am

    nancy (aka money coach),

    I applaud you for not having any more debt and it seems you paid yourself first(savings for that rainy day) while you had debt.

    =o)

  • Rod Payne August 10, 2007, 1:24 am

    I just set aside $20 per paycheque and forget about it. I’ve never had to draw on it, but it’s nice knowing it’s there.

  • Credit Analyst August 15, 2007, 12:34 pm

    Just some food for thought…

    Something that alot of people talk about is that they have an PLOC for emergency. I work in Banking, I manage credit and risk for a major US bank that operates in Canada. What I can tell you is that your credit card companies actively watch your credit files and if your PLOC makes a mjr jump in balance over a short period of time (due to unemployment for example) it will decrease your FICO score. Your credit card companies will be alerted to this decrease and depending on your balance they have a clause in there contracts that they can “risk-based reprice” your account. Which in other words means they will increase your credit card rates dramatically. This is a strategy to get your attention and also get as much money from you just incase you go bankrupt and cannot pay them.

    With this in mind it will not affect everyone but if your balances were greater than 50% of the avalible credit and you had a decrease in your FICO you could be subject to this kind of strategy.

    Just thought people would want to know about this little technique that they use to detect the people they think are risky so that they can effectively manage there emergency fund accts.

    If you have question about credit or want to dispell any myths I would be more than happy to help.

    Credit Analyst.

  • squawkfox February 26, 2008, 5:10 pm

    I keep an emergency fund of 15K. I must be weird. But I enjoy the peace of mind since I work in a cyclical industry where anything can happen. I also don’t have any debt.

  • oOKitijimaOo February 26, 2008, 7:20 pm

    squawkfox, if your 15k is about 3-6 months buffer of income than you’re not weird. You’re doing better than you think.

  • cash_man December 19, 2011, 11:14 am

    For people that would hold no cash, I wonder how well they would weather a situation like many people in the US went through, having job losses, market down and a upside down house at the same time.

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