How do you calculate number of months in your EF?

[ceejay74]

I know I've asked this question before, but I don't feel like I've ever gotten a sense of what most people do.

Do you simply count one month of net income? Or do you calculate the minimum you would need to cover bills and basic living expenses?

For instance, if you make $6000 a month, and you spend $3000 on mortgage, utilities and other necessary bills but put $2000 into savings and retirement while spending $1000 in discretionary items (cable, eating out, etc.), would you count a $6000 emergency fund as covering one month of expenses or two?

[disneysteve]

Personally, I wouldn't include the savings portion because in an emergency situation, I wouldn't expect to be adding to savings. I also wouldn't include any extra that is currently being paid to debts. When I was out of work, I stopped all the auto-investing plans and stopped the extra student loan payments.

As for discretionary items, the answer is it depends. You need to calculate what your actual expenses would be and what things you would be willing and able to cut out if necessary. For example, a cell phone is a luxury but if you are locked into a contract for your service, you might need to continue to pay that bill even if something happened to your income, in which case you need to include that in your EF planning. And would you truly be willing to give up all eating out or would you still want to do some of that to maintain your sanity and some measure of enjoyment of life.

[creditcardfree]

I'd count it as two. I agree with DisneySteve, too.

[disneysteve]

To answer the specific question, in that scenario, I'd probably count it as more than 1 month but less than 2, closer to 2.

[ceejay74]

So do you have an exact emergency budget written out, or do you have a general lump sum in your head for what constitutes a month for you, such as "$4000 is about a month of expenses for my family"?

[GREENBACK]

My view of an emergency situation is just that. It's an emergency! All unnecessary expenses must be put immediately on hold.

Savings/retirement, and any thing that is discretionary should not be a part of an emergency fund. I try to imagine the scenario where my main goal is to conquer the emergency situation for however long it takes.


It's difficult to predict or plan for this stuff so I personally try to imagine a worse case scenario and work off of that. Nothing that isn't an absolute requirement is factored in.

To answer your question, I would see that as two months of expenses. Even in an emergency situation though you can have other small emergencies crop up so maybe add a little for that.

[creditcardfree]

Yep...approximate lump sum. Ours is about $3500 per month. Although, I think we could get by on a little less. Since we are military the odds are extremely low our emergency fund would be for a lack of income.

[MonkeyMama]

Our actual expenses are $5k/month, though we could probably make it on $4k if a job was lost. (This is just expenses - not savings).

I personally started with a $4k figure to start my emergency fund. For the long run I rather have $5k x X in the bank. But I think when you are starting an efund it is okay to start smaller. As you meet your goals, increase them. Otherwise it can feel rather futile.

(I am also okay with the $4k figure because assets can be sold, and unemployment or disability or other insurance would likely kick in, in emergency. But in the end, I am kind of in the "more is better" mentality).

[skydivingchic]

I have recently fully funded a two tiered EF. The bulk is 6 months expenses plus a smaller amount which I believe will cover most non-doomsday type emergencies. The 6 months worth of total expenses includes my Roth contribution and sinking funds for things like car maintenance, but not my personal (short and mid-term "fun" goals) savings. The second tier is a much smaller amount which would cover things like my max out of pocket expenses for a year of health care, any major car repair, or any major vet emergency. The 6 months is meant to cover job loss or really catastrophic events.

In reality, I could and would cut some expenses and stop contributing to my Roth in a real emergency. This would add a month or two to the funds, but it makes for an easier and more conservative calculation to count all spending. Additionally, whatever personal savings I had amassed at the time the emergency occured could of course be used to extend my EF further.

I realize the two tiers are really just one big pot of money, but I like to see them as separate buckets. Who me, OCD?

[Radiance]

I want to have 1 year full expenses in the bank, that is my target for EF.
But if I have to use it before I get there, then I would measure on minimal expenses mode.

[disneysteve]

Originally Posted by ceejay74

So do you have an exact emergency budget written out, or do you have a general lump sum in your head for what constitutes a month for you, such as "$4000 is about a month of expenses for my family"?

Just a general idea here. Of course, we also don't live off of a written budget normally, so that fits our usual mode of operation.

[JustDave]

I think of our emergency fund as treading water financially until things get back on track. That means all of the bills are paid with minimal disruption of our normal life. Obviously we wouldn't go out to eat, but I'm not sure we'd be cancelling Netflix on the first day either. We'd still keep phone/internet access (which would be needed for finding a new job), but
the saving and investing we normally do every month would be put on hold for a while. We try to live frugally, so our 'bare minimum' monthly bills are relatively low.

[wraddylan]

Good very good

[EconoMutt]

We just took a snapshot of all our bills for 1 month and then multiplied them by 6.
We kept all of our cell phone and cable bills included in the total.
That way we have a buffer in case it looks like unemployment could run a little on the long side.

[Broken Arrow]

For me, I look at minimal monthly expenditures. My goal is about one year's worth.

[disneysteve]

Originally Posted by JustDave

I think of our emergency fund as treading water financially until things get back on track. That means all of the bills are paid with minimal disruption of our normal life. Obviously we wouldn't go out to eat, but I'm not sure we'd be cancelling Netflix on the first day either.

I tend to agree, but I also know that this is often a mistake that buries people. They wait too long before cutting back and going into survival mode. That's happened to many people in the past year or two. They lost a job and figured they'd find something quickly so they didn't make any major cutbacks. Next thing they knew, it had been 6 months or 9 months and still no job prospects but they had burned through their savings maintaining the same lifestyle. Had they slashed spending from day one, their savings would have lasted for many more months. Sometimes they do it to "protect" the children and try and go on as if nothing has changed. The reality is that the kids know what's up and would rather give up premium cable and trips to McDonald's than have parents who are stressed and fighting about money all the time.

[fruitbowlk]

You can always use a Emergency Fund worksheet to figure how much you will need.

Ex: http://www.smartaboutmoney.org/Porta...rgencyfund.pdf

[Caoineag]

My first EF goal will be 6 months' worth of expenses plus some discretionary if both of us lost our income (not as much as normal, but enough to maintain sanity). A bigger concern for me though is the amount of savings I need for the periodic big picture items (new roof, new car, etc). These items tend to be larger one time events that if left unplanned can spring up at the worst possible time. So my current EF is the money I am saving for things I know will need replacement in the future.

I do have exact numbers because I have a written budget.

[ceejay74]

Thanks guys! Now I have more of an idea of the range of meanings it can have when someone recommends a 3-month EF or 6-month EF.

For myself, because I do spreadsheets for fun, I made out a budget where I cut all discretionary/spending money, any student loans that we could get hardship deferment for, and all savings. I cut the grocery/household line item way down. Cut Internet (we could go to the library) but kept cell phones (we have no land line). But then I added in $400 per month per person for health insurance and $85 per month per person for bus pass (our only mode of transportation).

It came to $4900/month. (That will go down to $4300/month in December when I pay off a debt with a large minimum payment!) Realistically we would stretch the money much farther because we'd have assistance like unemployment (and hopefully could find cheaper health coverage), but this is how much we'd want per month if we had no assistance.

Based on that number I have less than a month and a half in emergency funds. (But once I pay off that debt, just over a month and a half! What a difference getting rid of debt makes!)

[bjl584]

I use monthly gross income as my guide. I am working on building a 6 month gross income EF. It's a lot easier than trying to figure out all of the details of monthly expenditures.