This is how much you need for your emergency fund

Photo courtesy of Christian Dembowski

 

An emergency fund, as I’ve talked about before, is a fundamental part of any sound financial life. You want to get to the point where you could live for six months on what you have socked away. (Retirement accounts don’t count here, as there are huge penalties involved for tapping them.)

But most likely you still need to get to that place where you have that cushion. And since number crunching may not be your comfort zone, you may get a little avoidant when it comes to figuring out how much you really need.

Never fear. I’m here for you. I’ve done the math, so all you need to know is what your salary is, and you’ll know within a range of how much you need to put away to have a fully funded emergency fund.

Let’s oversimplify

Put away $10,000. You can stop reading. See you next time.

Seriously, that’s enough to start.

Okay, let’s not oversimplify that much

The following is a list of salary ranges, with the resulting range of emergency fund required.

Emergency fund
Salary range Target fund range
Under $25000 $6000 – $8000
$25000 – $40000 $8000 – $12000
$40000 – $60000 $10000 – $15000
$60000 – $80000 $12000 – $20000
$80000 – $100000 $15000 – $25000
Over $100000 $20000 – $40000

Caveats all over the place

These numbers are rough. Over-simplifing is a tricky business (which is why most people don’t like to do it), and so I made some assumptions. So take note:

  • The above salaries are annual and before tax, not take home pay.
  • Since everyone’s tax situation is different, I calculated a range of tax rates to come up with a range of take home pay values.
  • Salary is only weakly correlated to bills and expenses, and this correlation grows weaker as incomes rise. For example, most people making under $25,000 are probably living paycheck to paycheck, but people making $100,000 can have vastly different standards of living, depending on how much they can “live on”. (Savings is not factored in these totals, as someone experiencing an emergency could just stop saving.)
  • I assumed that one is able to live on one’s salary, and isn’t spiraling into greater and greater debt over time. If you’re able to do that, you’re already in an emergency.

If you want to calculate it out for yourself

It’s not difficult to figure out how much you really need for your emergency fund. Just do the following:

  1. Add up your monthly bills.
  2. Add to this all of your monthly expenses.
  3. Exclude any savings you put away each month (whether you consider it a bill or an expense).
  4. Multiply the whole thing by 6.

(Here’s a glossary on the difference between your bills and expenses.)

Your bills are fairly easy to calculate. Your expenses are harder to calculate from scratch, but if you’ve been following my plan, you’ll be writing down everything you spend already, so it’ll be easy to look back and add them up. (Yes, I know it’s hard.)

So if your bills are $1000, and your expenses are $1000, then you’ll need a $12,000 emergency fund ($2,000 × 6).

See how easy it is?

The feeling of relief is why

While I believe that the emergency fund is a fundamental part of any sound financial life, I also believe that this is also fundamental part of one’s emotional health and well being.

Is that going too far? Well, I can personally attest that the day I realized that I had six months of bills and expenses in the bank, there was a strong feeling of relief and reassurance. Whenever I worry about my ability to make it through, whenever I have a sense on insecurity in the job market, I think about that balance, and it makes me feel better. It makes me feel like I’m going to be okay. I can’t tell you how much this helps me.

And now that you know what you need, you’re one step closer to having that sense of relief too.

But enough about me. Do you have a target emergency fund?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on February 15, 2016
  • Anna

    I try to keep $20000 in CDs and a savings account for emergency purposes. We are going to be taking it down to $15000 to get some remodeling done and that fact makes me nervous even though we’ve never truly needed the emergency funds. We should be able to get it backup to the full amount in 6-8 months though.

    • Hi Anna. Thanks for weighing in! I’m glad you have a fair amount of savings in the bank. You’re doing really well!

      My only suggestion might be that you may wish to separate your savings from your emergency fund. This may just be a bookkeeping exercise, but I think it’s important to have an emergency fund that is used only for emergencies and not touched otherwise. While remodeling is totally fine (and quite exciting!) it’s probably not an emergency. Save that for savings, which you can use for whatever you want!

      But you bring up a great point, which is after you deplete your emergency fund, it’s important to get it back up to your target level as soon as possible. Focus on that to the exclusion of other projects, and it likely won’t take that long. It sounds like you’re totally on top of that, which is great to hear. Keep it up!