How to Determine the Right Amount of Money for your Emergency Fund

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Because of mostly watching clickbaity YouTube videos to learn about personal finance while I was in college, I used to believe that every adult should have a $10,000 emergency fund. Exactly $10,000. Every single person. 

Naturally, it’s more complex than that. But the advice still seemed to vary from source to source. I heard $5k-$10k, 3-6 months of expenses, even a year of expenses. Some folks believe you should always have more than enough for security, while some argue that having more than you need is actually hurting your net worth because you could invest the extra money and get a better rate of return. 

It’s a tricky subject because all sides are basically correct, and your personal comfort level and risk tolerance is the most important factor. Here’s my personal philosophy: 3 months of expenses if your job is secure, 6 months if there is a possibility of losing your position. This is because 3 months of expenses will likely cover an emergency that isn’t job loss (i.e. if your car breaks down, you need to move in a pinch, travel for a funeral, etc.) as well as cover you for a while in the unlikely case that you lose your job. 

From there, you need to determine exactly how much 3-6 months of *bare-bones* expenses is for you. The best way to know this is, of course, to budget. If you don’t budget, you’ll have to do the extra work of looking at your bank statements and determining how much you spend on necessities each month, and multiply that by 3 or 6. If you have a budget, you just add up the necessities each month (minimum payments on debt, groceries, rent and utilities, gas, etc.)  and multiply it by 3 or 6.

Here’s an example using my numbers (with about a $15 buffer added to each category to ease my mind a bit)

Rent & utilities & insurance: $630

Gas: $115

Groceries & restaurants (not a necessity but still): $230

Miscellaneous & subscriptions: $115

And a little extra: $200

Everything else in my budget is savings, so total expenses for me right now are: $1,290 x 3 = $3,870

However, this will increase drastically when I move later this year, since I’ll probably be spending a lot more in rent each month. It will probably be closer to $5,000, so this is what I’m aiming to have built up by the end of the summer. 

I side slightly with the idea that having way too much emergency fund actually costs you money in the long run, but we all have our financial baggage, and mine is that I’m afraid of risk and instability because of where I came from. So this is how I reconcile my feelings with my values– which is kind of what personal finance always comes down to.


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