Whether you are paying off debt, or are debt-free, having an emergency fund is a necessity for your financial health. But the amount of your emergency fund may vary depending on your current circumstances. Let’s be honest. As much as you wish it wouldn’t happen, emergencies still come up!
But having an emergency fund turns an emergency into an inconvenience. Simply because you’re prepared and have the money set aside!
Here are three different amount options for you to save in an emergency fund depending on your financial circumstances.
1. While Paying Off Debt
While paying off debt, many people get intense about paying off loans as soon as possible, and often forget about keeping some money in the bank. But emergencies won’t be stopped just because you’re diligent in paying off debt. It’s important to keep money in an emergency fund even when you’re on your debt-free journey.
If you’re a Dave Ramsey follower, you’ve probably heard Dave talk about baby step 1, which is to save $1,000 in an emergency fund even before paying off debt. This is a fundamental part of a debt-free journey because you don’t want an unexpected emergency to lead you back into more debt!
While you do need an emergency fund, you don’t need to have a ton of money in it. The purpose of this is to keep you motivated to pay off that debt as soon as possible so that you can save even more in an emergency fund! You want enough to cover an emergency, but not too much that you feel comfortable in your debt-filled finances.
When we were paying off debt, we kept $3,000 in an emergency fund. This was enough to cover an emergency or two, but still didn’t allow us to feel comfortable, so it kept us motivated on our debt-free journey. We felt that $1,000 wasn’t enough because that wasn’t even a month of rent! I would recommend keeping between $1,000-$4,000 in an emergency fund while paying off debt.
So did we use our emergency fund while paying off debt? Nope. Never. We had a couple things come up, like replacing tires on both cars, but we were able to cash flow it during the month! But it was nice to know that we had the money there in case something bigger came up.
2. Debt-Free and Predictable
Once you’re debt-free, it’s time to increase that emergency fund. I would recommend sticking between 3-9 months of expenses into an emergency fund after being debt-free. But you’ll be on the low or high end depending on your life circumstances.
If you are debt-free and life is a bit more predictable, I’d recommend closer to 3-5 months of expenses. What do I mean by predictable? You and your spouse both have steady jobs. You are renting so you don’t have the additional costs for fixing things when it comes to home ownership. You have reliable cars. You have no kids… The list goes on. But if you don’t have a lot that can go wrong, feel free to stick closer to 3-5 months of expenses.
For Jacob and I, this is the situation that we fall into. So we decided to keep 5 months of expenses ($10,000) in an emergency fund-that we just finished this week!
3. Debt-Free and Established
When your life is more established and you have things like kids, a house, a couple cars, and maybe a stay-at-home parent, you might want to consider raising your emergency fund closer to 6-9 months of expenses. Having an established life can be expensive. And there is more that can go wrong if you suffered something like a job loss.
When we have a house, we plan to bump up our emergency fund because houses are expensive! The roof could leak, and the dishwasher goes out and we’d be out of luck! But having a solid emergency fund while being a home-owner is a financial game changer.
Adding Up Expenses
In the last two emergency fund amounts, I referenced having an emergency fund full of a certain number of months’ expenses. So what goes into that? Simply, all necessary expenses. So if I were to loose my job today, what would be the bare necessity expenses I’d need so I could live for another month?
Things like groceries, rent, utilities, some gas, and insurance all fit into that scenerio. But things like eating out, vacationing, blow money, and giving don’t. So when you sit down to figure out how much you need in an emergency fund, determine what your monthly necessity expenses are, and multiply by the number of months you want to keep in your emergency fund!
Whatever financial circumstances and stage of life you’re currently in, it’s so fundamental to have an emergency fund ready to go! Being prepared with your finances allows you to turn emergencies into a simple inconvenience.