How to Calculate Your Emergency Fund

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Given the state of the world, I thought now might be an interesting time to take a look at how one calculates an emergency fund. We’ve talked before about where to keep your emergency fund a number of times over the years (and it’s the first step in our general “roadmap” for personal finance), but I don’t think we’ve ever discussed HOW to calculate your e-fund. So let’s discuss: Which bills and expenses do you include in calculating your emergency fund? How many months of expenses are you trying to save, and how many months do you actually have? If you needed to draw on your emergency fund for an extended period, do you have ideas about how to reduce certain bills? 

I’ll acknowledge at the start that deciding how to “calculate” your emergency fund is an exercise in privilege — for many people, just saving ANY amount between living expenses/income can be difficult. (I’ve read that only 41% of Americans would be able to cover a $1,000 emergency with savings.) But — beyond freaking yourself out (deep breaths, everyone!) — knowing how to calculate your emergency fund can be important if you’re trying to decide how much to “keep in cash” versus investments or spend for large purchases like a down payment on your home. (In other words, if you’ve saved $50,000 total and want to buy a house, not all of that can be used for a downpayment — you need to calculate how much to keep for an emergency fund.)  

How long should an ideal emergency fund cover you? I’ve always read that an emergency fund should be between 3–9 months’ worth of living expenses, and I’ve always interpreted that as “money to live on if you have no income.” (My memory of the 2009 recession is that many BigLaw friends were out of permanent work for 6-12 months, and many took much lower paying jobs when they finally did get work. This page from the US Bureau of Labor Statistics has a bit more detailed info.)

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Now, as I type all this out, I realize that there’s another fun reason for emergency funds — unexpected disasters — that we’ll get into more below. But keep that in mind as we discuss calculating your emergency fund. 

How to Calculate Your E-Fund 

Here’s a list of categories to use to calculate your emergency fund:

  • Mortgage/rent payment 
  • Health insurance premium
  • Utilities and other regular home expenses (e.g., condo fees)
  • Major bills you can’t get around (for example, we amortize big expenses like our insurance bills)
  • Spending is tricky — for us, I would base this heavily off the average for the last 6–12 months of grocery spending and try to add a little bit more each month for other “living life” expenses.
  • Childcare if needed (if you’re still paying it at this point in time). This is also tricky, even in non-pandemic times because if you’re in a place where you need your emergency fund it may be because one parent has lost a job, so there might be some temptation to say, “great, why pay for daycare now that Parent is home!” I would argue that childcare costs, at least to some extent, should be in the budget for as long as possible to allow that parent to look for work, network, etc. 

We don’t factor in my husband’s 401K because those amounts are automatically deducted from his paychecks; they would probably be the last to go (unless of course he were to be laid off, in which case they would stop entirely). I would probably stretch to continue our monthly 529 deductions as long as possible, at least to some extent, particularly in a bear market. My own retirement accounts are a bit wonky because I only make one deposit a year, and the amount varies. (Right now, for every dollar I earn, I take X% and put it in an online savings account for my retirement, and put Y% in a second online savings account for taxes. So I would probably still take out X% and Y%, but as time went on I might have a hard discussion with my accountant about which tax bracket we’d actually be in. (I have a separate emergency fund for the blog so I haven’t included any blog-related expenses in my emergency fund amount.)) 

This is all… a lot of money, to be honest! And as I type this all out I realize it doesn’t leave a lot of wiggle room for “unexpected disasters,” which still might happen at a time when there is no income coming in. I’d be curious to hear how you guys attempt to calculate that ahead of time (or if you just really hope you don’t need an emergency root canal or something while you don’t have an income!). As noted above, this primarily matters if you’re trying to decide how much money to keep in cash versus other investments — so if those other investments are even slightly liquid (such as, say, after-tax investments in the stock market), maybe that is the “unexpected disaster” fund. 

A Few Ideas on Reducing/Cutting Costs

In addition to the notes on retirement savings and 529 savings above, places we could cut:

  • We pay extra principal on our mortgage each month — that would be cut pretty quickly.
  • We have a lot of automatic savings (vacation fund; savings for our coinsurance and health care deductibles, which we somehow always hit; small automatic investments in the stock market) — we would probably reduce those, or if we could keep those auto-deductions going, I would view that money (especially our vacation fund) as just another part of our emergency fund. 
  • The amount for monthly food and necessities is highly variable — we could probably cut that down significantly with study and sacrifice. (We had an interesting discussion last year on CorporetteMoms about how much we all spend on groceries for the family if you’re curious!) 

Can You Use Your Retirement Savings? 

We may do a separate post on this issue (many of these facts we already discussed in our post about how to choose between cash savings vs retirement savings)!) — but if you’re wondering if you the money in your retirement accounts is available, here are some quick notes:

Readers, what are your thoughts? Have you calculated an amount for your emergency fund, or are you just trying to save whatever you can right now? What is included in your emergency fund, and do you have any ideas on how you could cut expenses further if you really needed to? Where have you kept your emergency fund — is it in a savings or checking account, or are you including other sources in your calculation, such as CDs or Roth IRA contributions?

Stock photo via Deposit Photos / mozakim.

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