What Does A “Fully Funded” Emergency Fund Mean To You?
Every time I hear the words “fully funded emergency fund”, I start to think about what that really means. And thus far, I haven’t really come up with a good clear definition. There are lots of ideas and suggestions out there, but the definitive answer eludes me. Mostly because there really isn’t one.
There is a lot of banter among personal finance blogs, writers, experts, and even everyday people about the fully funded emergency fund. The general wisdom is that a fully funded emergency fund is 3 to 6 months of expenses in savings or another easily liquidated account.
Besides 3 to 6 months being a wide range for even the average person, it begs the question - what does the “fully funded” emergency fund mean to you? Is 3 to 6 months enough? Is it too much? Do you trend towards the 3 or the 6 or something else entirely?
As the economy does more things that unsettle me, I’ve begun to really ponder the whole paying down debt versus hoarding cash angle. There will be more on that in a future post, but the whole idea has made me really question what exactly is a fully funded emergency fund, and if there really is a rule of thumb I should use or follow. How do I decide what fully funded means to me? How much savings should I shoot for to be held in a savings account “just in case”? What impact does that number have on the rest of my financial aspirations?
There are a lot of questions in this post and no real answers. So I ask you - what do you consider a fully funded emergency fund, and why?
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December 17th, 2008 at 10:35 am
Being an accountant and financial advisor, I don’t particularly care for the phrase “fully-funded” when speaking of anything that does not have a finite contribution limit. It is fine in terms of an IRA or a 401(k) since there are defined limits for contributions, but emergency funds are a whole other story. Personal circumstances are always changing, and major life events can occur at any given moment, so I prefer to view the emergency fund as a sliding scale. Generally I like to see 6-9 months worth of recurring expenses covered (ie: mortgage, utilities, insurance, etc) but it needs to be re-evaluated on a regular basis. In my view, there is no such thing as having too much money saved.
December 17th, 2008 at 10:53 am
It seems to me that it just means the desired funding is complete. I don’t mind someone saying that, but they should understand it doesn’t mean all emergency contingencies are taken care of. Just that the goal the person has for their emergency fund is fully funded.
I agree that it could be less than clear to say “fully funded” when people might think that meant something more than the goal being fully funded.
December 17th, 2008 at 11:16 am
Given my personal circumstances, a “fully-funded” emergency fund is 4 months-worth of expenses. This will probably change down the line but that’s all I’d like to have in readily-accessible cash at the moment.
For me, “fully-funded” means enough to have a safety net, but not so much that I lose out on better interest rates elsewhere. It’s not so much a question of how much I can put away, but how much I chose to put aside.
December 17th, 2008 at 11:34 am
I think for us it’s about 3 months’ expenses. Husband is in a sector with a lot of job security, so that isn’t a huge concern. So we’re thinking we’ll set enough aside in case someone hurts themselves or something, or if our car dies. When we have more money saved in other places, or we have kids- then we’ll probably aim for closer to the six-month range.
December 17th, 2008 at 11:41 am
For us it is also 3 months’ of living expenses. I know that there are plenty of examples out there to refute what I’m about to say, but statistically, the odds aren’t good that my husband and I will lose our jobs at the same time. Our emergency fund would ideally get us through 3 months if that were to happen, though, and would get us through 6 months pretty easily if just one of us lost employment (our salaries are pretty comparable). Since we don’t have our emergency fund “fully funded” at this point, we are socking away a larger sum than we used to every month. At the same time, though, we are still using a heavy hand to attack one of our student loans, with the goal of eliminating it (and fully funding our emergency fund) by the end of 2009.
December 17th, 2008 at 11:46 am
What does the “fully funded” emergency fund mean to you?
To me, the term fully funded is having six months of living expenses in savings or another easily liquidated account, plus an additional $1,000 for any unexpected house or car repair, etc.….just because you are unemployed doesn’t mean the furnace won’t stop working.
I think 3 months is just not enough in today’s economy and perhaps 6 months is even too little….for now, baby steps – I’m aiming for 6 months and can always change it to 8 once I get there.
How do I decide what fully funded means to me?
I think you just decide what you want it to mean for you and then you go from there.
What impact does that number have on the rest of my financial aspirations?
This all comes down to how comfortable you are with risk – if you don’t have much money in liquid savings and then your or your spouse lose your job (or heaven help you if you both do) are you really going to care that you had been making extra debt payments….is the credit card company (or whomever) going to give you a break because of it – heck no! Realistically, with the economy in the shape that it is in right now, everyone should be striving to save as much as they can and I think it should be done before extra debt payments are made; the minimums payments most definitely should still be made but then everything else should go into savings until you have enough to live off of.
My goal for 2009 is to start building a healthy emergency fund and I will be starting to save for it with the first pay in January. I put all of my efforts this year into paying off my car a year early – I finally accomplished this goal but I have no emergency fund. If I had lost my job this month or if I lose it in the first half of 2009, I will truly regret all the extra car payments.
December 17th, 2008 at 11:52 am
We’re a one-income family, so for us, having six months worth of expenses is what makes us most comfortable. We have additional savings earmarked for other purposes that we can also tap if we need it.
We have no mortgage (we’re renters) and have one debt (car loan).
December 17th, 2008 at 12:01 pm
I have no idea, I’m just getting started. My current goal is for 3 months. Once I get there, I’ll prob. make the next step 6 months.
December 17th, 2008 at 12:26 pm
Over the last 2 years-we built a 3 month emergency fund, saved up for a house down payment, bought a house, then decided to go to a $1000 emergency fund a-la-Ramsey, and wiped out the rest of our non-mortgage debt. Now that that’s done, we’re working to build the emergency fund back, this time to 6-month’s worth.
It’s all about priorities- how risk-averse and debt-averse you are.
December 17th, 2008 at 12:27 pm
Our emergency fund is currently fully funded with 6 months of expenses (including 5% mortgage and 0% car loan). In case of a real emergency though, I am sure we could cut some expenses and stretch that a bit longer.
I also have the same amount again in a savings account waiting for investment in mutual funds. I don’t yet have enough confidence in the market to pull the trigger. I am sure that more chaos is coming which has not yet been factored into market valuations.
December 17th, 2008 at 12:28 pm
I don’t know either. I suppose an emergency fund for 3-6 months expenses is fully funded so long as you find a new job within 6 months. Not so fully funded after that.
There are just too many what-ifs in life for me to ever feel like I am fully prepared for an emergency.
December 17th, 2008 at 12:37 pm
Our target is $20,000, which represents about 4 months of “normal” expenses and about a year of “bare bone” expenses. “Normal” is what we spend in a typical year divided by 12, and “bare bone” expenses are the absolutely essential ones that we wouldn’t be able to cut in an emergency situation (i.e. groceries, mortgage payment, utilities).
Both of us have extremely stable jobs (I’m in government, she’s in a high-demand area of health care), so we’re not terribly worried about job loss. We are, however, pretty risk-averse, so having a larger-than-usual emergency fund is important to us.
It’s rare to hear somebody complain about having too much money set aside in a rainy-day fund, and it’s all too common to hear tales of people who had too little saved and relied on credit during an emergency.
December 17th, 2008 at 2:15 pm
Well, I too have heard a variety of months, none of which we are close to having [sigh]. I would have to consider how many folks in the household work, how many HAVE to work to make ends meet, what do we consider essential services and how much could we cut back, will health, unemployment, or life insurance kick in. Also, employability of anyone living in the household, overall health, etc. all should be factored into savings. If you’re 20, single and healthy, I imagine you have less to concern yourself with than if you’re 55, with limited job skills, and chronic health issues.
In an ideal world I’d want 6-9 months, since that would allow for job training, returning to health, selling a home, etc….
[editorial] This is what makes me crazy about the cost of homes: that a purchase/mortgage is based on every adult in the household being fully employed. Surprise, not always gonna happen!
December 17th, 2008 at 2:27 pm
More than I have.
Actually, right now we’re really thankful we have 6 months of expenses socked away. My husband just got laid off from his job and we know that for 6 months, we’ll be okay - once you factor in his unemployment, we’d probably be okay for about 9 months. That’s a huge relief.
Having this account allowed us to consider picking up private term life insurance on my husband (something I wouldn’t do if I was wondering where the next mortgage payment was coming from).
We will cut back so we don’t blow through our savings foolishly, but it’s good to know that we don’t have to “panic” until August 2009 if he doesn’t find work.
December 17th, 2008 at 3:47 pm
While paying down debt that you have already accumulated is great. What happens if you were to loose your income tomorrow. What would happen at that point. That money that has already been spent still needs to be paid regardless. Having a safety net or what I call an “emergency fund” is extremely important regardless of the industry you are in for both financial and mental reasons.
December 17th, 2008 at 4:31 pm
The answer is of course what you consider expenses. I am of the Dave Ramsey opinion (and a believer in the 7 step program), and I can tell you, my monthly expenses will go down considerably once my debt is paid off.
Quite truthfully, anything is better than nothing. I want to get to atleast $10,000 for myself. This does not iclude my BF’s Emergency fund. Once I reach that goal of 10K, I will then actually bother to sit down and see how many months that will cover me for. The point though is to have a goal and to go for it.
I’m also inclined to go against the “everybody should” arguements and do just the opposite. Right now interest rates are lower (both for saving and borrowing) - which gives you a good push on paying off debt quicker. You should have been stashing cash when online savings accounts were above 5% APR.
That being said, I’m a 20 something and in a market where I’m not in fear of losing my job. Just the opposite, we’re actually very busy here.
December 17th, 2008 at 5:07 pm
I think 6 months is good and 9 months is better. I’ll probably never stop funding mine. This is only my fund for job loss. I have other funds set up for car emergency, house emergency, other emergency and those also get funded monthly.
It is a balance between paying off debt and emergency funds, obviously when you pay off the mortgage you’ll need less of an emergency fund.
December 17th, 2008 at 5:38 pm
Right now we have 1 months expenses. Next month we will hit two but the second is in our new to us car savings account. Its been filled and depleted a lot this year due to numerous car repairs, I know you can relate.
We are one income. Our basic struggle is trying to figure out how little savings we can handle having for a short period after we purchase another car. We can get a 100k miles car at the end of next year or a 50k miles car at the end of 2010. Only if we are ok with still only having 1 months emergency fund.
This issue is making us rethink not getting a car loan at all to maintain our financial flexibility - although if we buy used the best rates presently are 7% so saving up for it makes lots of sense.
I want 6 months in cds or savings accounts and then another 6 in bonds or something with a higher interest rate that still protects the principal - just a bit harder to get too.
December 17th, 2008 at 7:52 pm
I have 3 months of expenses saved up. My wife works, and it is unlikely that both of us will lose our jobs at the same time. I don’t have a mortgage, so I don’t feel the need for a whole lot of extra padding at this point in my life.
Although, my goal is to pay off the almost $20K student loan bill by early fall. Instead of applying my left over cash to the bill each month, I will be hoarding this cash in a separate savings account. When I reach the $20K, I will evaluate our situation (job security etc.) and decide to pay off the debt or hold some back for extra security.
December 17th, 2008 at 9:12 pm
I personally have stopped paying as much on my credit card debt and instead put the extra in a savings account while waiting to see what happens in the next few months for the economy. While I may lose some money because of the interest (12% on my credit card) it gives me piece of mind to have more cash on hand right now. I am currently in grad school and staying home with my 7 month old son, my husband works for a airline shipping company, I graduate in May and will go back to work- then I will reevaluate where I am putting our money.
December 17th, 2008 at 9:32 pm
The fund is intended to meet mandatory and basic living expenses for the length of time in which you won’t be earning income. The expectation is that you’ll have no other sources of income. I’d say that the length of 6 months to meet those two expense categories is a minimum, and it goes up as the probability of finding work,if needed (in your field or outside of it) goes down. It also goes up as your personal obligations increase. Estimate with pessimism.
December 17th, 2008 at 9:52 pm
I read somewhere that an emergency fund should not only have 3 to 6 months of living expenses but also enough money to cover all deductibles from all insurance policies. So, $500 for the auto, $1000 for the medical, $250 for the renter’s insurance, etc…Whatever insurance deductibles YOU have, they should be added to your 3 to 6 months of living expenses.
December 17th, 2008 at 10:04 pm
A few months ago, I set a long-term emergency fund goal of $10,000. I have absolutely no idea where I got that number from!
December 17th, 2008 at 10:11 pm
my goal for my emergency fund has been fluctuating lately. last year, I had no separate emergency fund, but I felt comfortable as I had about 2 years’ expenses in my downpayment fund. Now, with my downpayment fund smaller (some of it was in stock) and with my job security very low, I would like 1 year’s expenses saved on top of my downpayment fund. This would last me 2 years if my spouse is still employed, but of course, there’s no guarantee that he won’t lose his job either.
December 17th, 2008 at 11:05 pm
My goal for an emergency fund is half of my salary. That’s over six months’ of salary, obviously, because I would tighten up expenses if I was not earning money. I’m not even close to that, but it’s my goal.
December 18th, 2008 at 12:34 am
I never thought of my emergency fund that way. I think the idea of saving for emergency fund is not a fun one and maybe that’s why people want to be done with it if it is at a good level. Every year I will use some part of it, while depositing more into the account every paycheck, and I don’t think I’ll ever be done. I do re-balance my different accounts (emergency, auto, vacation etc) at the end of the each year to help accelerate my other goals if needed…it feels good to give myself a bonus!
December 18th, 2008 at 7:33 am
i am undecided and confused on this one. how about if you don’t have enough to sock away in big sums and it takes you longer to build up one? i guess 6 months sounds ok to be fully funded..
December 18th, 2008 at 8:53 am
I was laid off 6 months after buying my first condo, and I had used up most of my savings (I had about 3K left) to make the purchase. At that time in my life I had substantial student loan debt, a car loan and I didn’t have an emergency fund. I was unemployed for 5 months and my unemployment check covered about 3/4 of my mortgage, leaving me to scramble for the rest of the payment, plus all my other expenses. It was the most stressful financial period I have ever had; in the scheme of things it probably wasn’t that bad, but at the time I was really frightened. When I found a new job (I had to move across the country for it and it was very hard, but the job was a good one), I focused *a lot* of energy on building a savings, funding retirement (of course that’s lost a ton this year!) and paying off debt. I don’t feel like there is any magic number that would make me feel “fully funded,” but my desire to have money in the bank has outstripped any desires I have for material things, vacations, etc. (Not that I don’t have these desires anymore, just that it’s easier to prioritize than it was before.)
December 18th, 2008 at 9:36 am
Lots of thoughts on this floating around out there. But I caution those following Dave Ramsey’s $1000 emergency fund in this economy. A year ago my husband was laid off the day after Labor Day. After 10 years with his company and an impecable record- we NEVER thought this would happen. The company made “across the board” cuts and 11 people were let go, regardless of senority or reputation. At the time we were following Dave Ransey’s steps and paying down debt with only $1000 in our emergency fund. It took my husband 2 months to find work. In that time we had my part-time income and only $1000 savings. It was not easy. We paid only our mortgage, home owners ins., car ins. and food and gas- everything else had to wait. (We actualy went 4 months without any health insurance) It was scary- since we didn’t know how long we might have to stretch this money. Luckily, he found work and we worked out repayment plans with all of our utlitiy comapnies and other debts.. but now, over year later, we are not fully back on track. We are still “catching up” with some things. I am proud to say that even with all of this we never went back to using any of our credit cards! We hope by January to finaly be caugh up and back to attcking those credit cards.
As for an emergency fund– in this ecomony- no one is safe from being laid off. And finding a job, where there are none to be had, means your “emergency fund” must be bigger that whatever you previously thought. I would caution anyone who only has $1000, no matter how secure your job is, to at least double that if not more! We are working to have at least 3 months set aside ($12,000). Since we were able to make $1000 last almost 2 months, if need be, on a bare bones budget, that money could really be stretched.
December 18th, 2008 at 10:20 am
Paidtwice, I’m really glad you brought this up. I’ve been very determined to follow Dave Ramsey’s advice and everywhere you look you read how it’s more logical to aggressively pay down debt and use credit for emergencies, but my gut has been very sensitive to the economic slump we’re in and my instinct is to save, save, save. I’m so glad I now have 29 opinions to support my own. I’ll feel a little less guilty about doing what I feel I need to do.
December 18th, 2008 at 10:33 am
It’s the $$number that lets you sleep comfortably at night.
For me, it used to be 3 months of bare bones - which is $1200 now. However, I don’t worry about it anymore as I am at the point where I can dip into retirement $$ in 3 months.
Now my idea of fully funded would be interest on assets to last me til death… that’s a lot harder number to nail down
December 18th, 2008 at 10:49 am
It really depends. Since my wife and I both work for the same company, in the current economy, I think that our FF EF needs to be a little higher than most. We are aiming for 9-12 months.
In January, we will start putting half ($700) our snowball towards our debt and half ($700) towards a FF EF.
December 18th, 2008 at 1:52 pm
When we started the DR plan, we had no money in savings and it was huge for us to pull together $1000 for something unspecified like just sitting there in savings. After a year or two though, we were no longer in debt, but still struggling to make ends meet each month. our emergencies tended to be pricey and with 4 kids and older cars, they tended to happen more often than other people’s emergencies. So we decided to do everything we could to increase it to $2000. And that is where it sat for many years. finally about 2 years ago we started working on our fully funded emergency fund. We still aren’t there, however we do have $5000 just sitting there in a savings account marked emergency. We have about $7000 in other savings accts for periodic expenses. I feel pretty comfortable, especially since dh has a very stable job. I still think that $10,000 would be ideal for us, however with needing to save cash to pay for a new roof and a new van in the next couple of years, I don’t see us increasing the amount in our EF by anything.
December 18th, 2008 at 5:22 pm
I initially based our emergency fund on our maximum yearly out of pocket costs for our health insurance. That felt right to me because I liked knowing that if anything went wrong medically we’d be okay for awhile. We have several other little savings funds (like one that covers a year’s worth of estimated auto related expenses) that could also be drawn from in an emergency.
December 19th, 2008 at 4:05 pm
As a single mom of teenage twins, my ideal right now would be a year’s salary in my EF, but that will take a while to accomplish. While I believe I could find a job relatively quickly should my current job be downsized, I would still feel better having that amount available.
December 19th, 2008 at 4:47 pm
For us, fully-funded doesn’t mean expenses, it means income (because for once we’re living below our means). So our plan is to have six months of income set aside. Eventually we would like a year of income set aside. We (thank goodness) have no mortgage, but we do have two very small children who need diapers and food and shelter and clothes every month.
December 21st, 2008 at 7:17 pm
To me, a fully funded emergency fund would entail at least 6 months’ worth of salary. That is, of course, the ideal. The more realistic would be for 6 months’ worth of major expenses: rent, insurance (this is a big one that I wonder if people forget… assume around $500/month for COBRA), utilities, and a realistic grocery bill. If you’re preparing in case of layoff, I’d also want a little extra padding to allow for the fact that we’d be spending at regular-salary rates beforehand, and so might have some bills coming due from that.
December 22nd, 2008 at 12:27 pm
I have 6 months of income saved up plus $4,000 in a rainy day fund. In this economy, I would feel more secure with 12 months or more. My industry, while seen by others as high paying and steady, has taken some huge hits with companies going out of business similar to the financial sector. I know of people in my field taking a 1-2 years to find a job.
I’m also a big believer in keeping other “little accounts” for small “emergencies” so I don’t have to use my EF, rainy day fund or credit cards. I also take care to be up to date and make periodic use of CC’s to keep the lines open.
Finally, my $4,000+ account I managed to put together by keeping extra money such as change, expense reimbursements, garage sales, money I find in my coats, even money back when purchases went down in price and the store gave me back the difference. I am surprised how fast it added up. I have $80 in quarters rolled up on my desk ready to be put into this account. It’s a nice way to build up a little cash cushion.
In these times, savings and cash is very important. I have one loan I pay extra on and could pay-off, but I prefer the relative security of having the cash on hand. As a prior poster said, the loan companies won’t care you paid extra when you have to default on a loan.
December 26th, 2008 at 11:52 am
I wrote about financial planning and money makeovers for nearly 20 years at The Kansas City Star before my job vanished last fall in a downsizing. Now I’m taking the lab practical big time. Basically, I recommend going longer than you think you need to. You can always use the money later for something else if you are fortunate enough not to have an emergency.
More important, I think there is a relatively simple way to determine how much you really need. Test drive your emergency spending plan now, by cutting your expenses to what you think you need to get by while you stash your unused income in a bank or money market account. If you estimated accurately, you’ve got a head start on your saving. If not, you have a reserve to dip into before your need is real. Either way, you should come up with a pretty accurae idea of three, six or however many months times what that you want to shoot for.