How much is needed in emergency fund?
Greg Kratz
Typically, they recommend that you keep enough money in an easily — but not too easily — accessible fund to cover three to six months' worth of living expenses.
And when I pass along their advice, I usually leave it at that.
But a reader named Alison sent an e-mail seeking specifics.
"I have been struggling with this everywhere I've seen it, ever since we got out of (credit-card) debt 15 months ago and started to save up for this fund," she wrote. "Defining what should be included in this number is very elusive!"
Alison wrote that she and her husband both have full-time jobs, and they have four children. She is wondering if their emergency fund should cover their take-home pay each month or their expenses.
She estimates that it would cost about $4,000 per month to cover their mortgage, life and car insurance, car payment, student loan payment, fresh food, gasoline, clothing, cable TV and Internet service and cell phones.
"So, is that IT? 'Cause getting to $12,000 in savings sounds a lot better than three months of our take-home pay, or for that matter, three months of our 'normal' expenses (food, gas, transportation, gifts, entertainment, clothing that we would not spend if times were tight)," Alison wrote.
Excellent questions, Alison. I turned for answers to Mike Peterson, spokesman for American Credit Foundation in Midvale.
"What an emergency fund's purpose is is to cover your expenses while you're in that emergency situation," Mike says. "Let's say one or both of them lose their jobs. Your emergency fund needs to pick up where those left off and cover your expenses for a period of time."
However, Mike also recommends that people consider their monthly expenses at their maximum value when building such a fund.
"When you lose an income or when you have an emergency of that nature, if you've calculated for the worst possible scenario — meaning you've got to cover all of your expenses for that period of time — that leaves you in a much less stressful situation," he says.
"If you can cover the mortgage and the car and the entertainment and the food and everything else, that doesn't mean that, in the event you end up in an emergency, you should go out and spend all of that, ... but it gives you the freedom to make some decisions that way."
While it is true that people usually cut back on spending during times of crisis, having more saved will give you more time to seek a new job, for example, or to otherwise extract yourself from the challenging situation.
Recent comments
The problem with putting a specific number on what you should have…
veedub | June 1, 2008 at 2:38 p.m.
