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Emergency Fund Guidelines: Do You Really Need 3, 6, or 12 Months?

By Dayana Yochim - Updated Nov 24, 2018 at 1:37PM

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What’s wrong with the “save 3-to-6-months of your income” rule and how to calculate how much you really need for a cash cushion.

We've all heard the emergency fund rule-of-thumb that advises having "three to six months of income" stashed away in a safe place for those just-in-case scenarios.

There's a problem with that nugget: It's gotten mangled a bit in the retelling.

When it's repeated just like that, word-for-word -- "three to six months of income" – it gives the misleading impression that you see in the shocked faces of listeners as they calculate exactly how much money that means and then ask in a shaky voice, "Are we talking net salary or gross?"

Rest easy (or at least a little easier). The three/six-month emergency savings guideline should be based on your monthly expenses, not your income. And we're not even talking about a dollar-figure that covers all of your expenses. Your emergency fund simply needs to be enough to cover your must-pay expenses.

Jar full of coins with a label that says "emergency" sitting on a white tabletop.

Image source: Getty Images.

What expenses do you really need to cover in an emergency?

Let's say the rug was pulled out from under you and you had to get by for a while without a regular paycheck. What are the bills and other incidentals that you absolutely must pay every month to get by? Here's what should be on most people's lists:

  • The roof over your head and utilities to keep your place habitable: Rent/mortgage and utilities (not counting premium cable, unless your heart would literally stop if you couldn't access Game of Thrones) are must-pays.
  • Food: You've got to eat. But you don't need to do it in restaurants all the time. So budget enough to cover a reasonable amount for groceries (and any meals/drinks/coffee out if that's how networking in your industry is done).
  • Medications: Your health isn't something to short-change during tough times, so don't forget to include this in your tally of monthly expenses. Talk to your doctor about ways to cut costs without risking your health, perhaps by switching to the generic version of any drugs you take or buying online (and in 90-day supplies).
  • Transportation: Got a car payment? If you suddenly stop sending checks for your ride you'll end up hurting your credit score and maybe even losing your car. Now, if you're a two-car family in a town with good public transportation, selling the extra set of wheels may be a way to stretch your emergency savings further. But for the purposes of calculating how much you need for your emergency fund, use your current car situation.
  • Insurance: It's tempting to stop paying for things like insurance (one of the few things we buy yet hope never have to actually use), but imagine how much worse your financial situation would become if you got into a fender-bender or if a storm blew the roof off of your house and you didn't have insurance to help cover the losses.
  • Recurring bills: Don't overlook any monthly bills (like your cell bill or home alarm system) or any expenses that you pay quarterly or annually. Here, again, calculate your expenses based on your current situation. Down the line you can revisit your actual needs and start cutting costs if you need to (e.g. downgrading your current mobile plan) when your contract ends, especially if changing plans would cost you money right now.

What's not on the emergency expenses list are two categories of things:

Luxuries: This means "I can live without this" stuff – literally, you can physically survive doing without. This includes things like scrapbooking supplies, poker night play money, summer camp for the kids, gym memberships, and Reiki treatments for the cat. Remember, we're talking about a cash cushion to help break your fall in an emergency situation (whether employment-related, medical or mechanical (darn cars)), not a "pretend like nothing happened and hope this resolves itself quickly" account.

Savings: If you're doing the whole pay-yourself-first thing and socking away money to cover upcoming things like vacations, a new car, or a kitchen renovation, don't include that "bill" to yourself in your emergency fund calculation. Same goes for money you put away in a college fund or even your retirement account. While it might be painful and counterintuitive to put your savings plan on hold, when you're trying to avoid plummeting head first into a pit of credit card debt and financial ruin (or, more gently, trying to get by for a while when you're not pulling in a paycheck), it's best to put your limited funds to work to cover current expenses. Once the emergency is over, get back on your long-term savings schedule.

Once you know what it costs to run your life, at a most basic level, it's time to calculate exactly how many months of expense savings you actually need.

Do I really need to have enough emergency savings to cover 3, 6 or even 12 months of expenses?

That depends. In general, the less steady your paycheck and the more people who depend on your income, the larger your emergency fund should be.

Obviously, the standard answer isn't going to apply to every situation for every household. But the 3-6-12-month rule-of-thumb is a good starting point for figuring this out. After that, targeting the right sized emergency fund for your particular employment/dependents situation can be focused by answering the following questions:

  • How regular is your paycheck? Freelancers, contractors and anyone who doesn't have a traditional full-time salaried gig need to financially brace themselves for feast-or-famine times. This is especially true if you have just a few big clients who, if they went away, would put a serious crimp in your paycheck.
  • How healthy is your company? Do you work in a high-turnover field? Is the company you work for on shaky financial ground?
  • How many people depend on your paycheck to support them? If you have a stay-at-home or part-time worker spouse and kids, your emergency fund should be larger than the single guy who has a healthy cat.
  • What are job prospects like in your current field? Do you have skills that are in high demand? Or would it take a while to find employment (maybe because you're so highly specialized or are in a more senior position)? Also consider things like whether or not you might have to move to a new area to find comparable work.
  • Can you freelance or work as a contractor while you look for other work? Your willingness and ability to take on other work – even if it's unrelated to your primary job – buys you more wiggle room and cuts down on the amount you need to stash away to survive.
  • Are there others in your household that can bring home the bacon when you're not? (This is a situation where it's nice to be the parent of a successful child actor.)
  • How easy is it for you to access other money, such as a home equity line of credit or other savings you can tap (e.g. a college fund or new-roof savings account)? All things being equal, if you can access money elsewhere, you can justify a smaller emergency savings.

Don't worry about coming up with the exact right dollar amount to put aside for your emergency fund. Having something saved is better than nothing. The important thing is to start saving (make "fund emergency savings account" a priority if you're just starting out) and to adjust accordingly as employment situations and family needs change.

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