How Healthy is Your Emergency Fund?

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While most financial experts have different opinions on how much should be in your emergency fund, most agree that you should definitely have a cushion for emergencies.  Here is my advice on how to build your emergency fund.

3 to 6 Months of Expenses Rule of Thumb

Conventional wisdom suggests you hold three to six months of your living expenses in your emergency fund.  Start with your net paycheck and determine what you spend a month on expenses.  If you spend $3000 per month on expenses, the rule of thumb is to have $9000 to $18,000 as your emergency cushion. It’s a noble goal to aim for but realistically, most folks choke on those large numbers.

Tackle the goal of building an emergency fund by first taking a close look at your expenses.  If you were to lose your job today, what MUST you still pay?  Certainly, the mortgage or rent, your car payment, and groceries would make the list.  But the money you are putting into savings and expenses like eating out and entertainment could go.  Figure out your bare-bones expenses and then calculate a more realistic scenario as your savings goal.

Start Smaller with Your Saving Target

Even using these stripped-down expenses to compute the needed emergency fund savings might feel like too overwhelming a target.  Many people reach this point and just give up and assume “saving money is just too hard.”  But it is not.  Choose an amount that is manageable to save.  Start building your savings cushion with a goal of $250 or $500.  Work diligently toward that number, and then keep pushing yourself to save even more.  Was your target $500 and you are at $450?  Pat yourself on the back and reset the target to $750.  Keep going!

In this way, you steadily move toward a larger target.  The key to achieving saving goals is consistency.  If you are uncertain about how much you are able to save, choose an absolutely manageable number and start there.  Once you establish a habit of putting money aside in an emergency fund, you can increase the amount you are saving incrementally.

Other Saving Strategies

In their book, The 2% Rule to Get Debt Free Fast, authors Alex and Cassie Michael suggest an emergency fund equal to 1% to 2% of your gross annual household income.  For a family with a household income of $60,000, the emergency target would be in the range of $600 to $1200.  The Michaels encourage you to accomplish some other goals and then shoot to increase your emergency fund.

Financial Guru Suze Orman, on the other hand, claims that three to six months of your living expenses is too little to save.  She recommends emergency savings equaling eight to twelve months of living expenses.  While I personally feel that level of savings is extreme, her point is well taken: the more you have in your cushion, the more impervious you will be to household financial catastrophe.  I can certainly agree with that.

Whatever your target and method for saving are, write down your goal and get to work.  With slow and steady effort, you can get this done.  You’ll feel incredibly proud of yourself for your effort, and your stress level will drop thanks to having a good financial cushion.


How much do you like to have in your emergency fund?  Do you have tips to share about how to build one?

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