Emergency Fund - How Much Do You Need?

photo by lotospin

photo by lotospin

The routine advice on emergency funds tends to be routine. 3-6 months most advisors will tell you is enough to deal with potential challenges you may face.

In light of the current economic climate and with unemployment I recall reading a couple different authors (sorry I don’t recall who) advocating that an emergency fund be increased to as much as 9-12 months of living expenses.

How much you really need is not that easy to determine. There are several factors that should be taken into account before determining the right amount for you.

First consider how well you are managing your finances currently. If you are in debt up to your eyeballs and living paycheck to paycheck you’ve managed without an emergency fund to date so why start now? Yes, most financial advisors may want to challenge this opinion, but it will still be my opinion.

This point of view is a direct result of being in this very position. When I commited to fixing my financial life, I attacked debt with persistent purpose. Once I woke up to the realities of this common American lifestyle I wanted out and I wanted out as fast as I could. I had no emergency fund previously. The way I looked at it there couldn’t be an emergency fund that was secure until I eliminated a chunk of the debt.

Once you begin to get ahead of your debt, once you can consistently make good progress at reducing the debt AND divert a small amount toward building your emergency fund, do so. Is there a magic number or ratio to determine when to begin diverting money to your emergency fund? I don’t think so. You will have to decide when you are comfortable at your rate of debt reduction coupled with building an emergency fund.

The second consideration to determine the amount you need in an emergency fund is your relative job/income security. If you work in a commissioned job that has a lot of volatility, or a field with high turnover you will want more than a person working in stable field with a salary. Your magic number is probably between 6 and 12 months of current living expenses.

This money should be divided between a savings account and a short term CD or Money Market Account. This gives you ready access immediately. As you begin to use up the savings, the CD or MMA can be tapped when necessary.

A third consideration is the potential for catastrophic incidents. Do you live along a fault line in Southern California, in tornado alley, or on a flood plain? Is there a remote chance that you could find yourself fleeing with 4 million of your friends and neighbors? If so you may want a reserve stash of cash above and beyond the 6-12 months noted above.

When natural disasters hit, especially unexpectedly it doesn’t take long for the masses to descend on the closest gas stations and grocery stores.

Hopefully you will be at the front of the line. But if you are not you may experience the laws of supply and demand in ways you never expected. If you are holding a stash of cash and you are in need, you will be able to afford whatever necessities you require.

Assume you live in the Midwest and your house is destroyed by a tornado. If you have $2000 stashed underground in a weatherproof box, you will have the cash to cover gas and lodging until you can make it to a community with access to your banked reserves.

Assume you live in earthquake central, Southern California. A little one that damages your house may leave you in a similar position as a tornado in the Midwest. When the big one comes roads will likely be unusable. You may be stuck in a community in distress. Food, water, and housing will become scarce quickly. If you have ready access to say $10,000 in cash you will be in a much better position to care for your family and yourself than most.

Where do you hide this kind of cash AND make sure it is safe? This also depends on your circumstances. In a tornado zone it probably needs to be secured underground or in a safe that is bolted to a cement slab or foundation. A similar approach could be taken for an earthquake zone. In areas that may flood unexpectedly or fire prone zones you may want to find a location that is more easily accessed. Here are a few ideas to consider:

  • In a plastic lidded tub or glass jar buried in the yard, use a sprinkler or rock formation as a marker.
  • Unzip a foam throw pillow, cut a slit in the foam to hold some cash.
  • The inside pocket of a jacket you never wear in the back of your closet.
  • Place the money in an envelope and tape it securely to the inside of a file cabinet or chest of drawers after removing a drawer.
  • Wrapped around the jack handle in your trunk if it is placed inside a pouch.
  • Buy a cheap vase with a very small opening, or an inexpensive ceramic lamp that you can disassemble. Either can be easily broken if necessary and neither are likely to be stolen if your house is robbed.
  • Lastly, don’t put all your money in one place. Divide it up into 3 or 4 locations just in case.

What are your thoughts, can you have too much stashed away? Where else would you hide money? Please leave a comment below with any suggestions you may have.


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2 comments to Emergency Fund – How Much Do You Need?

  • Hey Greg – What a great website you’ve set up with all the functions and stuff! I wish I could design something as nice 🙂

    I like your ideas about segregating your emergency funds and putting them in various places. Maybe even put it in a place you’ll forget ,so you know you’ll really never touch it!

    I think at some point, the emergency funds morphs into an overall life savings fund that is used for retirement.

    Keep up the posts and best of luck!

  • Mudacator


    Thank you for compliments.

    I couldn’t agree more in reference to morphing. Once you have an emergency fund you can then begin investing. I no longer have my liquid funds “separated” from others but maintain about 6 months worth in liquid cash. As time goes, if I need more, I can dive into my taxable investment accounts.

    Regarding the catastrophic cash stashes, those remain. Though since moving from California to an area that has no earthquakes, a low risk of tornado and a home on top of a hill, I no longer feel the need to keep more than 1K.