[b4freedom]

How do you calculate what your emergency fund should be?

Bust out your budget.

To get your minimum emergency fund, multiply your monthly “essential” expenses by 6. Essential expenses are expenses that you must pay in order to keep yourself out of default, to keep your family sheltered, safe, and feed. This includes mortgages, loan payments, utilities, insurance, groceries, etc.

To get your ideal emergency fund, multiply your monthly net income by 12.

For example, if our monthly essential expenses are around $2500/month, our minimum emergency fund should be $15,000. If our combined take home pay was $4000/month, our ideal emergency fund would be $48,000.

That’s a lot of money to try and save up for an emergency. But, that’s basically what you’d need.

My wife and I had a child 9 months ago. Two months after our son was born, my wife was in an accident and couldn’t care for our son. She was immobile for 15 weeks. She couldn’t hold or nurse our son. The responsibility of caring for our son and my wife was on my shoulders. To top it off, our son was colicky.

Luckily, we had $18,000 in a net money market for an emergency fund. It took us 3 years to save that up before we had our son. Because of the accident I had to make some really hard choices. We didn’t have enough for me not to work, so we placed our son into day care, which added about $1500/month to our expenses. We cut every expense that we could. We became minimalist. For Christmas we asked that people not buy gifts and toys but give our son savings bonds and gift certificates to baby stores (for clothing, formula, diapers). A few friends even purchased us gift cards to grocery stores.

My wife is doing much better, my son is doing great. We are still over budget every month, but we get by because we had a safety net and because we stopped spending as part of an emergency financial plan. If we continue to be careful, we could "survive" another 6 months. After that, we’ll have to borrow more money in order to stay afloat. But, I don’t predict that will happen because things are getting better.

The problem with borrowing money to stay afloat is that you’re borrowing money which you really can’t afford to pay back. This leads only to financial insolvency.