Home » News » How Much Should a Person Have Saved in Their Emergency Fund?

How Much Should a Person Have Saved in Their Emergency Fund?

There is the simple answer to this question and the more complex one. The simple answer it 1 – 3 months of your expenses, boom! done time to move on… Were you looking for some more thought? Okay…

The emergency savings fund is basically the second step in building your financial future. Its up there right after creating a budget. The emergency saving is the buffer that allows you to stay out of a financial death spiral where you fall into more and more expensive debt, then you lose the place you’re living, then you are homeless! Okay a bit dramatic but still it is the worse case scenario.

So what are some things to think about for your emergency savings? Well where are you on your path to financial independence (or at least low financial stress)? Your emergency savings does not need to be built up to 3 months before you do anything else. You can think of it as an incremental process. I think a good first goal is 1 month’s of expenses, that should give you a little breathing room, it honestly would probably be sufficient for most “normal” financial emergencies. You can build your emergency savings up along with your other savings and investing goals as you move along your plan. As you become more and more wealthy the emergency savings takes on a different role, it becomes less of an emergency type item and more of a liquidity buffer. There are many rich people who are very very asset rich but cash poor, having an emergency savings for them is about having access to liquid assets quickly. In that kind of circumstance your emergency savings doesn’t need to be only in cash, it could be put to more use like a liquid portfolio of stocks and bonds.

Another aspect of your emergency savings to think about is your risk appetite, are you a super safe individual, or are you a more “all in”, “let it ride” type person?

Low risk people may have a tendency to over save in their emergency fund, because for them feeling safe makes them feel good. That is fine, build that thing up to 1 year of expenses, but be careful that you don’t over do it. Having $400,000 in a checking account is not a great long-term idea, the bank will love you for it, but think about what you might be leaving on the table for your future self by being overly cautious.

A high risk person may have a real hard time with the concept of an emergency savings at all. “Why waste my money in cash when it can be earning in the market?!” I personally have a little bit of an investment addiction so in some ways fall into this category to a certain extent. To be honest 9 out of 10 times you would be just fine without an emergency savings, with all the credit products out there these days, but emergency savings is a kind of insurance policy. You shouldn’t really expect to use it, but if you did need it you’d be SOO glad you had it. For the more risk oriented person, think about hiding your emergency savings from yourself, not literally but place it in a different bank, or at least out of sight, after a while you won’t think about it as much and it could be easier to keep it unused in “wasteful” cash :).

Leave a Reply