You are on your journey to establishing financial security. Then BAM! The car “dies” or one of your family members requires an emergency room visit.
If you do not have an emergency fund in place, these unexpected expenses can send your financial plans into a tail spin. You reach for that credit card, the one you swore you would not use to “rescue” you. Instead of paying off debt, this “emergency” has you piling on more debt. Right then and there, you may give up and accept debt will always be a part of your life.
YIKES!!! Please, please, please establish an emergency fund TODAY to avoid a mess like this! I do not care if it is $5, $20, $100 but please put something in your “rainy day fund” and continue to pile up that cash!
Mini Emergency Fund vs. Emergency Fund
Mini Emergency Fund
In the initial stages of getting your finances on track and paying off debt, you may be comfortable with a “mini emergency fund.” In Dave Ramsey’s baby steps he recommends a $1000 emergency fund ($500 for those with incomes below $20,000). Something is always better than nothing, but please view this recommendation as the ultimate minimum emergency fund you need.
Personally we were comfortable with 1-3 months of expenses for a “mini” emergency fund. However, today I want to focus on the fully funded emergency fund.
Emergency Fund: tips from the “experts”
The amount you should have in your fully funded emergency fund is where things start to become confusing. Some “financial experts” will recommend 3-6 months of bare essential expenses. While other “experts” will recommend a full year’s worth of income in an emergency fund. This can be a HUGE difference, so how do you know if you have “enough?”
When Should You Establish a Fully Funded Emergency Fund?
In ideal circumstances you will have a fully funded emergency fund once you are out of consumer debt. Get out of debt and then start saving as intensely as you were paying off debt!
Your Emergency Fund
First, clarify the use of YOUR emergency fund. Will you be using this emergency fund only if you lose your income? Or will it also cover car and house repairs? Medical expenses? Other unexpected/unplanned expenses?
Some people prefer to have separate funds, such as a “home repair fund” and “car repair/replacement fund” on top of their emergency fund. Others prefer to lump all these savings and expenses into an emergency fund. There is no right or wrong way, after all it is personal finance, “personal” being the key word!
Factors to Consider
There are several factors that are going to impact how much you need in YOUR emergency fund. You need to look at these factors as “risks” and determine the probability of these risks impacting your emergency fund.
How reliable is your income? Are you a double or single household income? Have you been at your job for years and have a secure position in the company? How quickly would you be able to find employment if you were laid off?
If you are a two-income household with steady and reliable jobs. You have less risk of losing your income. You would probably be okay with a smaller emergency fund. If you are a single income household, you will need a little larger emergency fund because if the sole income earner loses his/her job, you will have NO income.
Do You Own a House?
If you do. I do NOT need to tell you repairs can be EXPENSIVE! If your emergency fund is going to cover unexpected house repairs. You need to consider the cost of possible repairs.
Your homeowner’s insurance will most likely cover the huge expense if your house is ever damaged severely. However, take note of your deductible and be sure your emergency fund can cover it.
Even if your family is relatively healthy. Make sure your emergency fund can cover deductibles. You never know when an emergency surgery or hospitalization will be required. Your emergency fund is there to prevent debt. Medical bills are known to cause havoc to one’s finances. Be prepared!
If you are going to have an emergency fund that covers everything. Take your car’s condition into consideration. How likely will your vehicle need a costly repair? How soon will your vehicle need to be replaced?
You will need to consider possible family circumstances that may impact your income or expenses. Will you or your spouse need to be a caregiver for a family member? Are you or your spouse pregnant? Will you or your spouse be transitioning out of the military soon? Will either of you be returning to college in the near future? There are numerous circumstances your family may be facing that would cause the need to increase your emergency fund.
Yes, I am referring to you military families and business professionals who travel and/or move often for your employer. For those of you who are required to travel on your own money and then wait for reimbursement. Be sure your finances are ready for these expenses. I do not need to tell you that traveling and moving is EXPENSIVE. Be sure you have these expenses figured in your emergency fund or a separate fund.
Our Emergency Fund
To put actual numbers to the above thoughts I will use our emergency fund and budget as an example.
Our monthly expenses are roughly $2800. This is the basics: rent, utilities, insurance, food, fuel to work, and the difference between the mortgage we pay and the rent we collect. Therefore, a very basic 3-6 month emergency fund would be $8400-$16,800.
We currently have one income, my husband’s military income. It should be a relatively secure income. Congress passed a bill in 2013, which protects military member’s paychecks from a government shutdown. Also, my husband’s enlistment still has 2+ years left so if the military decides to “fire” him. We should have several months notice to prepare our finances. Also, if push came to shove. I could move back to the states. I am very employable state-side and could be employed within 2 months. My income would cover our basic needs.
Medical & Car
Our medical expenses are very minimal because we are both covered through Tricare (military health insurance). Our plan has minimal co-pays and no deductibles. We also fund our car separately. We have $3000 in this fund. In the UK, this buys a reliable used car.
Our major risk is our rental property. The monthly payment (including insurance & taxes) is $950. If our renters were to move out we would need to cover it until we had new renters. Also, our 1970’s house will need many things replaced/repaired in the near future. We figured $10,000 should be our biggest possible expense.
Military Move (PCS)
My husband is currently on a controlled overseas tour with a dependent (me 🙂 ) Therefore, we know with as much certainty that is possible in a military lifestyle that we will live in England for 3 years. We have just over a year left. Once we have approximately 6 months from our PCS date. We will decrease our debt pay-off and increase our emergency fund. However, at this time our emergency fund does not consider this expense. Although in an “emergency PCS” situation, we could cover the expenses with our fully funded emergency fund.
Total Emergency Fund
Considering all of this, we have decided on a nice round number of $20,000 in our emergency fund. Do you think it is enough? too much?
How to Calculate Your Emergency Fund
- Determine your basic/survival monthly expenses.
- Calculate your 3-6 month emergency fund.
- Determine your financial risk for an “emergency”
- Low risk. You should be fine with an emergency fund around 3-months of expenses.
- High risk. You will be better off with an emergency fund of 6-months or more of expenses.
Is Your Emergency Fund BIG Enough?
Please take into consideration your own comfort level with your risks versus your safety net. An emergency fund is there to protect you from accumulating debt. With the appropriate insurance plans and an adequate emergency fund, you can protect your family from a financial disaster.
***Keep in mind I am NOT a financial expert, advisor, counselor, etc. These suggestions are only based on my research and experience. Please contact your financial advisor for personal finance advice. Military families, please remember financial counseling is FREE on military installations if you need basic financial advice.***