When your life changes, change your emergency fund


An emergency fund is a vital tool, not just in your financial situation, but also for your sense of emotional grounding.

But no kidding. I like to joke that a fully-funded emergency fund is like anti-anxiety medication, but without any side effects.

And what do I mean by “fully-funded”? I mean six months equivalent of bills and expenses in the bank. Not in your 401(k) or some other hard-to-access product, in a savings account. If you lose all income for a few months, you will be able to navigate that situation and be protected against larger problems.

How much am I talking about here? To find out how much emergency fund you need, add up all of your bills and expenses during a given month and multiply by six. (You are keeping track of your spending, right?) If this sum totals $1,500, then your target emergency fund is $9,000. If this sum totals $3,000, it’s $18,000. You get the idea.

But there’s one other point about your emergency fund that bears repeating: When your bills and expenses change, you will have to revisit your emergency fund, as it may no longer be enough. In which case, you may need to add to it.

This is what just happened to me.

A simple calculation

Let’s say you need $1,500 to live on. You then need $9,000 to have a fully-funded emergency fund. If your rent gets raised by $100 a month, then you now need $600 extra dollars. If your cell phone bill goes up by $50 a month, then you need $300 more dollars (or to find a better cell phone plan).

These are simple calculations, but they are important to do. Otherwise, over time, you could find that your emergency fund will no longer last you six months. While it may be enough, do you really want to find out?

A life less lean

Ever since I had a fully-funded emergency fund, I’ve set my target at $10,000. That’s technically more than I’ve really needed, but it’s a nice round number, and there’s not much downside to having a little extra for this. Plus, the benefit to having a bit more than you need is extra peace of mind. And boy do I love peace of mind.

Since then, my situation has remained relatively fixed. But with my recent impending purchase of a home, my monthly payments are going up. Significantly. I’m estimating that I will be spending $600 or so extra each month from here on out. That’s a big difference.

Now, $600 a month for six months is $3,600, so this means that my emergency fund is now around $3,600 short. But instead of having my target be $10,000 + $3,600 = $13,600, I’m rounding up to $15,000.

With all this rounding, could I get away with less, say $12,000? Sure. But an emergency fund is as much for peace of mind as for emergencies, so I think it’s okay to pad your numbers.

On the other hand, would I suggest someone in my situation keeping $25,000 in an emergency fund? Probably not, because then you start to run into the opportunity cost of your money. What else could all that money be doing?

Couch fishing for $10,000

So where do you find more money to put into your emergency fund?

In short: Anywhere you can find it. An emergency fund is important, and it’s important right now. So find it somewhere.

Here are some ideas:

  • Stop contributing to your retirement account. This is a temporary situation. You’ll be okay.
  • Stop putting any money into anything else. No other accounts, no saving up for that thing you’ve been saving up for. Put it on hold for a bit.
  • Sell something. It’s probably time to do that anyway. Get rid of some stuff.

The point here is that with an emergency fund that’s insufficient, you are increasing your risk. And you will make better progress if focus on it intensely for a short period of time, rather than half-focused over a longer period of time.

Get. It. Done.

Your life circumstances will change. Make sure your emergency fund changes with it. Lower your risk. You’ll feel better. And it’ll make you much less groggy than with Ativan.

But enough about me: Has your situation changed recently?

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