Should Your Emergency Fund Include Essential Expenses Only?

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  • You'll often hear that your emergency fund should cover at least three months of essential expenses.
  • My emergency fund has money for non-essential purchases as well.

Mine certainly goes beyond that.

You never know when life might throw you a curveball. Your home heating system could stop functioning on the coldest day of the year, or your car could break down and require a costly repair without warning. Or, you could lose your job and have your income be limited to stingy unemployment checks for a period of time while you look for work.

It's for all of these reasons that having an emergency fund is so important. Without money in your savings account, you might be forced into costly debt the moment an unexpected expense arises.

Now you'll generally hear that you should have enough money in emergency savings to cover three to six months of essential living expenses. And actually, these days, some financial experts are advising people to increase that target to six to 12 months' worth of essential bills.

But my emergency fund goes beyond essential expenses. It also has money for non-essential costs. And you may want to go a similar route.

It's all about reasonable expectations

There's a reason financial experts tell you to sock away enough money to cover essential bills. In a pinch, you could always cancel cable or stop dining out at restaurants if you're out of work. But you can't stop buying groceries, paying for medications, and covering your rent or mortgage, because you need to eat, stay healthy, and have a roof over your head.

But when I calculated my emergency fund, I included money not just for essential expenses, but also, some non-essential expenses. The logic there is simple. If I were to lose my job, I don't think it would be reasonable for me to spend my days enjoying zero entertainment while looking for work. And so there's money in my emergency fund to allow me to keep paying for things like cable, streaming services, and even the occasional restaurant meal in a scenario where I don't have an income coming in.

Now if you calculated your emergency fund and saved up enough cash to cover your essential bills for a number of months, you're in really good shape. But you may want to pad your cash reserves so that if you were to find yourself out of work and living off of savings, you'd still have the option to socialize on occasion, enjoy some entertainment, and preserve your mental health.

It is time to re-run those numbers?

If it's been a while since you put together your emergency fund, now's a good time to revisit your savings and make sure your cash reserves are adequate. Remember, living costs are up these days across the board due to inflation, so while you might think you have enough cash to cover six months of essential bills, you might, in reality, now only have enough for five months.

But while you're doing that, see if you're able to pad your savings so you have some money to cover non-essential expenses in the event of job loss. Doing so could make an otherwise difficult time a lot easier.

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