Emergency Fund: How Much Is Enough?

An emergency fund is something that’s talked about a lot. You cannot begin to construct a financial plan, to pay down debts or invest in assets without having an emergency fund. If you don’t have money saved for the unexpected, you will turn elsewhere and begin a cycle of debt. So how much should you save – 3, 6, or 9 months pay?

3 months pay

This savings guideline applies to those who have minimal responsibilities, no children, no mortgage, and a steady pay. Perhaps those who even have an added bonus of friends/relatives to fall back on, or move in with. Three month’s savings is a comfortable amount for those in this category should anything unpredictable happen.

6 months pay

This savings guideline applies to the majority of people. Those who have steady jobs, possibly two incomes and generally have larger responsibilities. Maybe your renting, financing a car, have least one child, or all of the above. Alternately if you are single, and have a mortgage to pay down this rule applies to you. If you are you are single renting and have one child this also applies to you. When in doubt, then the six-month rule applies to those who have at least one major commitment or responsibility that cannot be ignored. Especially if you don’t have the luxury of friends/family to help you in times of need. Six months of the highest earners income should be saved for a comfortable cushion.

9 months pay

There are some who don’t fit the criteria above and are required to go above and beyond the rest when it comes to defining a proper emergency fund. This category has to do with extreme circumstances. Are you responsible for more than that of the normal circumstances i.e. Do you care for a sick relative? Are you responsible for a business and paying others salaries? Do you have an unsteady job? If you answered yes to any of the above, you may want to think about saving 9 months’ salary for any unexpected events. When your monthly expenses are unpredictable its better to save up for the unexpected.

How much is enough? There is no right answer because you never know what will happen and how much you will need to cover the cost. The smartest thing you can do is use the guidelines above as a starting point, and build upon them. There is no such thing as being “over prepared” when it comes to finance.

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