What’s In An Emergency Fund?

by Shawanda Greene

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An emergency fund is an essential component of a sound financial plan. Having three to six months worth of living expenses in a high yield savings account is recommended by many personal finance experts.

Before deciding how much money you need designated as an emergency fund, there are two big questions you must answer: How many months of expenses should I set aside and which expenses do I need to include?

Although an emergency fund can be used for any necessary, unexpected mishap, it’s traditionally based on how much cash you’ll need if the most expected unexpected event occurs: a disruption in your income. Whether you’re an employee or a business owner, it’s reasonably foreseeable your income won’t always be stable.

So, how many months of living expenses do you need? The questions don’t stop here.

  • What’s your risk tolerance? Personally, I sleep better on a nice, plump cushion of cash – more support for my neck. But, you may have a hard time stepping away from the ledge even after you’ve gotten your finances in order. It’s possible you can’t bear the risk of missing out on superior stock market returns because you’re cash heavy.
  • Are you the sole or primary breadwinner of your household? For me, it’s just me. I only rely on me. Therefore, I lean towards the conservative side of saving. If I had little kids to feed, then I’d probably be even more conservative.
  • What’s the level of demand for someone with your skill set in the marketplace? Lower Demand = Fewer Opportunities = Longer Job Hunt. If you’re highly specialized in a certain field, you might have to relocate to secure employment. From time to time, I think it’s worth while to check out job boards just to see how many employers are looking for individuals with a similar level of experience as you. Do this whether or not you’re looking to switch jobs. It’ll help you identify new proficiencies you may need to develop as well as gauge the overall demand for your services.
  • What training is necessary to either update your current skills or develop new ones? It’s possible you and your employer have grown complacent with your existing skills. Other employers may not be so understanding. If you despise your current profession, then there’s little point in becoming more adept at it. Your true calling may require an investment in your education.
  • How much does this training cost? Okay, now I’m asking for too much. But seriously, you need to know this. Lacking desirable skills for your chosen career path could extend the length of your employment search.

You may be tempted to factor in non-guaranteed income when deciding how many months of expenses to include in your emergency fund. When faced with the staggering amount of money three to six months of living expenses represent, some people become uncharacteristically optimistic about their chances of collecting on old debts.

If your ex-husband consistently stiffs you on alimony, then don’t count on a windfall arriving just as the rain starts pouring. That money you loaned your cousin eight months ago won’t materialize when you need it either. Forget about that back child support your child’s mother owes you. Who knows when she’ll get a job?

As a matter of fact, anything you have not or cannot independently produce should not be considered. Phantom cash won’t pay the bills. You’ll likely qualify for unemployment benefits if you’re laid off, but you never know. Who’s to say your employment will end involuntarily? If you’re unemployed and you qualify for unemployment benefits then, by all means, take them. But, don’t depend on our government to operate effectively when you’re cash strapped.

Now, on to the next big question: Which expenses are included in an emergency fund?

Your monthly budget is a good jumping off point. For example, the quick and dirty way to calculate a six-month emergency fund is to simply multiply your monthly expenses by six. However, if there’s a break in your compensation there are certain expenses that’ll significantly decrease or disappear altogether.

Daycare, charity (tithes), and work related expenses such as parking  and tolls will all but drop off your budget completely. Presumably, you’ll eat more meals at home. If you have a long commute, the amount you spend on gas will be drastically lower while you’re spending the bulk of your day at home.

There is one very large expense that will probably appear on your budget: 100% of health insurance premiums. Don’t even dream of going without health insurance. A recently published study by the American Journal of Medicine suggests medical debt is the primary culprit behind most personal bankruptcies.

According to the National Coalition on Health Care, the average health insurance premium under an employer health plan for a family of four was almost $12,700 per year in 2008. The annual premium for an individual under an employer health plan was over $4,700 the same year. Expect to foot this bill when you’re jobless.

You can shop around for a better deal when it comes to health insurance, but COBRA (Consolidated Omnibus Budget Reconciliation Act), for the most part, gives you the right to continue coverage under your former employer’s health insurance plan. Individual health insurance is usually more expensive and may prove an impossibility if you have a preexisting medical condition.

There’s a natural tendency to think you’ll greatly cut your lifestyle if you temporarily lose your income. You will. When you totally deplete your emergency fund well before you estimated because you didn’t.

Be realistic. If all you have in your refrigerator is a damp box of Arm & Hammer solidified baking soda and a crusty capped bottle of three year old mustard, then please don’t fool yourself into believing you’ll metamorphosis into Susie Homemaker over night. Recall these are “living expenses,” not “surviving like a pauper, eating fried bologna sandwiches expenses.”

Keeping with being honest, are there any perks you’ve grown accustomed to that are currently provided by your employer? A couple days before my last day at my previous employer, I bought a laptop. I obviously had to return the company provided laptop, which also moonlighted as a personal computer, upon my resignation. Under my current arrangement, I’d have to relinquish my precious iPhone if I were to leave my present employer. I’m not going back to the Motorola RAZR. That ain’t happening.

Now is a good time to talk about what’s not an emergency fund:

  • Parents – To the extent you’re capable of providing for yourself like a responsible adult, refrain from asking or counting on your aging mother and father to bail you out.
  • Credit – Without warning, this source can suddenly dry up. It sure is strange how banks don’t want to loan you money when they’re unsure how you’ll pay them back.
  • Government – They’re incompetent and inefficient – double negative.
  • Investments in retirement accounts – It’s likely your retirement accounts harbor long-term investments whose values are more volatile than cash. You don’t want to be in a position where you have to liquidate investments at a loss. By the time you’re able to get back in, the market may have rebounded which would force you to lock in those losses.

You might think the emergency fund I’ve concocted is ultra conservative. It is. After all, cash is king. For an opposing view, check out Brian Scheur’s take on the emergency fund at Building Wealth Together.

This post was featured in the Carnival for Pecuniary Delights #18 – Celebrity Birthday Edition at My Life ROI.

Have I missed anything? Have you ever been unemployed and realized you weren’t adequately prepared financially? If you’ve experienced a life event that required a large sum of cash, what’d you do to address the problem?

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{ 5 comments… read them below or add one }

Torrey July 24, 2009 at 11:47 AM

Great post. I think so many people (I was guiltly for a while) go through life like nothing bad is ever going to happen. And the result is no cash reserves to cover them when something pops up.

I was helping a young lady with her budget last week and explained to her how important it was to have an emergency fund. So we started autodrafting money out of her check to a savings account. Hopefully more will do the same and understand its importance.


siddharth July 28, 2009 at 6:35 AM

Hi Shawanda,
Was a great post in the sense that it made me realize the importance and the types of personal expenses that should fit into an emergency fund.
But, I think that your post would’ve been better if you also mentioned some real world examples/financial products for an emergency fund.
I’m mentioning this since the importance of an emergency fund goes hand in hand with some sound investment advice which would not only help me out in tough times but also grow on itself when the sun is shining.
Great way of putting across your message though…!!!
You are a great writer!
Cheers… :-)


Shawanda Greene July 29, 2009 at 11:39 PM

Thanks, Siddharth. You know…it didn’t occur to me once to include financial products in this post. I’ll just tell you where to go now to find the best rates, because my response is long.

Go to
Bankrate.com and click on the Checking & Savings tabs to start searching for the institution that’ll offer you the best return on your money.

Whatever you do, don’t keep your emergency fund in actual cash dollars.

I use ING Direct. They usually don’t offer the absolute best interest rate on their savings account, but their rates have been among the best since I signed up with them about 4 years ago. I’m reluctant to open accounts every time a new player appears on the scene since interest rates change often. The bank offering the highest interest rate this week may not offer the best rate next week.

When it comes to emergency funds, some people want their money where they can get their hands on it immediately. With ING, it takes about 3 business days to transfer money from your savings account to your checking account with your primary bank. This isn’t uncommon for banks that exist almost exclusively on-line.

In the case of a true emergency, you probably could call ING and have them wire the funds into your checking account immediately. I haven’t tried this technique. But, I do have an ING checking account that I rarely use. Recently, I switched my primary checking account from Washington Mutual (now Chase) to a High Yield Investor Checking account with Charles Schwab. I won’t get into all the details, but I didn’t have enough money in any of my four checking accounts to cover the full balance on my credit card bill.

I don’t believe in paying interest, so, to me, this was an emergency. I transferred the money from my ING savings account to my ING checking account. The transfer happened immediately since it was within the same bank, and then I paid off my credit card balance using my ING checking account. If I had to transfer money from ING to Schwab or any other financial institution, it’d take about 3 business days to clear.

You can also use a money market account (MMA) to store your emergency fund. MMAs usually grant you check writing privileges, but the interest rates tend to be lower, and there are more restrictions on the accounts like minimum balance requirements and monthly fees. Yuck!

Hope this helps!


Sudeep July 28, 2009 at 8:28 AM

Hey ,
Such a nice post . I dropped @ ur website from our comment on Zen Habits ..
I knew the emergency fund , but never really thought in to deep in doing it personally .
After reading this article ,I think so I exactly know what to do .
Thanks a lot …


Hannelore January 10, 2015 at 3:46 PM

Wow! Such a residence!
Hannelore recently posted..HanneloreMy Profile


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