Six Levels of Emergency Funds

I always thought there was one basic level of emergency funds -- six to twelve months of living expenses. But in the book The Financial Crossroads, they suggest different levels of emergency funds based on a variety of factors such as the number of sources of family income, the nature of business supporting those sources, and the variability in those income sources. Using these, they come up with six levels of emergency funds as follows:

• 3 months' expenses for dual income household with salaried workers in stable jobs and industries.
• 4-6 months' expenses for single income household with salaried worker in stable job and industry.
• 6 months' expenses for dual income household with variable incomes in stable jobs and industries.
• 7-9 months' expenses for single income household with variable income in stable job and industry or salaried worker in unstable industry.
• 9-12 months' expenses for dual or single income household with variable income in unstable job and/or cyclical or volatile industry.
• 12 months' expenses or more for self-employed and business owners.

It's an interesting list -- and they have a good point. Why should everyone's emergency fund be the same when everyone's need for an emergency fund isn't the same?

Given the above, I'd have an emergency fund of 4-6 months' of living expenses. I'm a bit on the conservative side of things so I have around nine months set aside for emergencies.

How about you? Where do you fall on this scale and do you have that amount, more, or less saved in your emergency fund?

Comments

[Ryan@Fincycle]

I think you have to consider more than just living expenses. If you lose your job and have a medical issue or car problem you are going to want to have something on top of 3 months living expenses. In one of my recent posts I used the following calculation: x number of months, something for insurance deductibles, something for home/auto repair.

[Money Reasons]

Hmmm, interesting take on the matter, and the book's suggestion may be good for most people, but not for me.

I like the idea of having at least 4-6 months (I only have 4...) of living expenses in cash for emergencies, but the rest in diversified investments.

I think is we hold too much cash, we miss the opportunity to grow wealthy, someday!

After you have 4 to 6 months worth of emergency money, start channeling money into mutual funds, bonds and stocks, anything with a higher potential yield than cash? And preferable (if you qualify) a Roth IRA.

[Tim]

Good topic. I've often thought of emergency funds that way anyways. I also sometimes use different allocations. So for instance, if you have 9 months of emergency funds, the last three months or so could be set up in laddering cd's, or something else that is still accessable and not at risk of going down or being shut off when you need it. The theory being that you would have plenty of time to get it out and not have penalties.

During the last recession, I had 3 months in emergency, and the rest was my HELOC, which ended up saving the day when I was out of work for 5 months. I wouldn't recommend that now with what we know about lines being cut etc...

[Squirrelers]

I think that the need for emergency funds is greater than it has been in generations. The current economic and employment climate dictates paying more attention to interruptions/reductions in income than even a few years ago.

One year of emergency funds is a solid approach - even for dual income families. Companies in stable industries may still cut jobs to become lean or for other internal agendas, even if performing well on Wall Street. In today's environment, people may be unemployed for longer periods of time. Homes are harder to sell than not too long ago and many folks will lose money (or worse) if they sell, so people are less mobile to some degree today vs. a few years ago.

You don't want to lose money - once lost, its hard to recover. Just try to make sure that doesn't happen. Set aside an emergency fund for this purpose.

[Dr Dean]

Living expenses-that term itself, can be defined in so many different ways, just like "emergency fund."

This is a topic, that if it gets too complicated will scare everyone off. One size fits all doesn't work, but pretty soon you will need a spreadsheet and software program to decide about your emergency fund balance.

Certainly having more if things are unstable at home/job/medical problems makes great sense.

Also, can't forget other support stuff, like disability insurance.

[jim]

I think they make a good basic point that everyones emergency fund should be tailored to their specific situation.

[Ryan@Fincycle]

Money Reasons, I think having a cash position even for investment purposes is very important - if it's all invested you have no way to add to your position/investments during a major downturn. This downturn is a great example - you don't want to be in a situation where you lose your job and have to sell investments at the bottom because you didn't have enough in your emergency fund.

[Todd]

It makes sense to have varying levels of emergency funds based on each individual’s facts and circumstances. I do have one question with regard to the liquidity of an emergency fund. Is it too outside the box to consider accrued paid time off as part of ones emergency fund? For example, if I am able to accrue 400 hours of PTO this would be the equivalent of approximately $15K in additional funds (given a rate of $50 per hour and income taxes in the 25% bracket). It's my thought that the greatest need for the emergency fund would come as a result of unemployment. I can't think of too many other instances in which I would need such a large chunk of money that wouldn't already be covered by insurance. Any thoughts?

[Budgeting in the Fun Stuff]

My husband and I would fall in the 3 months emergency expense category (two salaried workers in stable jobs), which is good since that's what it's been at since he started graduate school last summer.

Our current goal is to have about 9 months saved up by December 2012 (an even $30,000). We'll be building that up slowly since we also want to fund two Roth IRA's from this year on out and build up a large opportunity fund (currently in hopes of buying a rental property or making a HUGE downpayment on our next house and using our current one as a rental).

[A Girl and A Boy who love each other.]

We are in this catagory:
3 months' expenses for dual income household with salaried workers in stable jobs and industries.

However we choose to have at least 6 months at all times.

[Ely]

We also fall into the 3 month category, and that is my current goal - which I hope to meet this year. I would feel more comfortable with 6 months but I'd be willing to consider maxing out my Roth IRA first.

[Liz]

While on this subject, can anyone give me thoughts on where to put my emergency fund money? I currently have savings in a regular bank savings account but was curious if there was a better place to funnel my emergency money? Thanks!

[FMF]

Liz --

That's probably as good of a place as any. Remember, this is money you want to have there when a bad event happens. That's the purpose of it -- to be there. Don't worry about trying to get an extra % out of it by putting it somewhere that could put it at risk. (You have investments for that purpose.)

[Budgeting in the Fun Stuff]

@Liz

Most of our emergency money is in a Smarty Pig account (2%) right now and the rest is in ING Direct (1.2%). We have $1500 of padding at our brick-and-mortar bank (0.01%) to tide us over if we need to withdraw from our emergency accounts since it takes 3 business days to get the money from an online bank.

[Mark C]

I hope this article was written before the real estate collapse and 15% real unemployment picture of 2009.

For me, 12 months is the minimum, three months of which is Roth IRA contributions that are readily accessible tax-free. I'm building towards 12 months cash/checking/savings just in case things don't turn around like they say, plus be able to contribute $5000 to my Roth for 2011.

[RetirementInvestingToday]

In this current economic climate I'd love to know the definition of a stable and unstable job. Here in the UK I'm sure a lot of public servants thought they were in stable jobs. After the next election they certainly won't be.

Personally I'm holding 6 months worth of ready access cash as an emergency fund.

[Moneymonk]

I'm not a business owner, but I keep 12 months cash on hand

[Rod Ferguson]

I have layers of "emergency fund"; I can access 1 month in about 5 minutes, I can access 6 months in 48 hours and I can access around 14-16 months in about a month.

I suppose I fit into the 6 month catagory (tapping beyond 6 months requires liquidation of some assets and positions, so my net worth is being impacted).

[Derek Clark - Christian Common Cents]

I fall into the first category, but hope to move into the last category sometime in the future so that is the number my wife and I are shooting for. We are there yet but we are working on it.

[Catherine]

I recently endured 13 months of unemployment. Nothing short of 13 months will ever be enough for me again.

In all that time, I never considered my Roth to be available as emergency savings, and fortunately, I went back to work before it became necessary. Interesting idea that others are using Roths in that way. I usually use that money to take the greatest risk with in hopes of the best returns, since I wasn't counting on needing it for 25+ more years. Still not sure I'd want to move my Roth to cash, but this is very interesting..........

[Debt Kid]

I think that's a pretty good guide. As a self-employed worker, my goal has always been 12 months, which fits!

[Arc Floor Lamps]

I liked reading this. Your emergency fund should be dependent on your job stability. However, it's difficult to define stability! Also, when you're unemployed things look different.
I'm self-employed, and I conservatively would like to have 6 months' emergency funds. That being said, I do have fall-back jobs, such as a casual job at a place I used to work. I think running a small business also puts a different spin on things. I like to have a "business emergency fund". Also, saving is more difficult now that I have a business - I just want to keep investing in my business! However, I'll let common sense prevail and build up my 6 months' worth of...

[J in FL]

Rod, I like the concept of layering. I would like to have at least 6 month in cash, anything beyond that could be not-so-liquid stuff.

[Mark]

I disagree with the premise that a less stable job should equate to a larger emergency fund. In my opinion, the fund should be large enough to support YOU while YOU either adjust to a lower income or find another position.

Hence a higher-paid or older person has to have a larger fund because they will take longer to find a job. Same for someone in a low-demand field.

And in a generally slow economy, if it will take you longer to find something - you need a bigger emergency fund.

Statistically, you could have more or less risk of losing your job, but that's irrelevant. It's about what YOU will do if/when YOU lose yours - not about taking comfort in the fact that you PROBABLY won't lose it! That applies whether you are a mortgage loan officer or a school teacher.

A self-employed person may have a fluctuating income, so maybe their lifestyle and emergency fund has to be built around the risk of their income dropping 50%. On the other hand, salaried people are either 100% employed or 100% unemployed, so thay have to plan for that.

[BD]

Since I have not found a full-time job and have to rely on freelance, which is basically 'own your own business', I have 10-12 months of bare-bones expenses in my e-fund savings.

[StackingCash]

I'm working on a 360 month emergency fund.

[Jane]

I also have a layer emergency fund which right now is at about 9-10 months of expenses. I am also building cash now but not to boost the e-fund but for expected expenses over the next few years. However, I consider this cash as part of my e-fund in a way because if I loose my job this cash will be going to fund my living expenses and not toward the "stuff" new car/more expensive house like I expected it too. I'd just use the cash to live where I am and continue to drive the hoopdie. In reality I see the last layer of my e-fund about 4 months of US savings bonds as my "true" e-fund everything else is an e-fund/oppertunity fund. So as a single person with stable income I guess I really only have the bare minimum 4 month e-fund.

[BCA]

I always try to have an emergency fund for at least 3 months if not more. Enough to cover all family expenses anyways. It is tucked away for this purpose only and not to purchase anything new, I would use it for a sudden house repair that had to be done, new roof or leaky windows that would cause my utility bills to go up.

[Ted]

Our household has 1 full-time worker in a very stable job/stable industry, 1 phd student teaching part time, and one adorable 3-month old who earns no income.

We're aiming for a 6-month of expenses Emergency Fund. We've got about 1.5 months put away now, adding $100/month.

We would add more but we're trying to reduce our debt.

[Darren]

I'd say I would have 6-9 of emergency funds. Both me and my wife are in stable incomes but I think this is what we can live on.