Emergency funds are a cornerstone of personal finance. In fact, the emergency fund ranks as one of the first things you should focus on when you start getting your money life in order. A lot of systems recommend starting with a beginner $1000 emergency fund if you are paying off debt or just getting your finances in order. Eventually, you should work toward building it up so that it can cover a certain number of months of living expenses. Your emergency fund should be able to pay for a large insurance deductible or medical emergency, or cover your living expenses for a few months in case of job loss.
Here’s the thing, though. We can all pretty much agree on the importance of having an emergency fund, but there is less consensus on how big it should be. Recommendations fall anywhere from 3-9 months of living expenses. And that’s a pretty big gap.
I personally have been torn up about building my emergency fund. There are so many other things I would rather be doing with my money right now, including crushing the last of my student loans, and I battle back and forth about whether an emergency fund is essential or overrated in my particular situation. I am young, single, and have several streams of income. Plus I am fortunate to live in a place where I enjoy a reasonable social safety net if I get laid off. Does it even make sense for me to have anything sitting in a savings account while I still have student loans at 5.5% and when I got a late start on my retirement savings? And how much do I actually need to save?
Asking yourself these questions is totally normal!
But the honest answer to the “How many months do I need?” question is that there is no one answer. It depends on your individual situation. Which I realize does not help you at all. So in lieu of leaving you with that generic answer, I have put together a short and highly unscientific quiz with ten questions that will help you figure out how many months of living expenses you might want to aim for in your emergency fund!
Now remember, serious disclaimer time. I am not a financial professional, do not take this post as financial advice, etc etc and you can go read more about that here.
Now without further ado, let’s get started with ten quick and dirty questions to help you gauge how much you need in your emergency fund. If you really want it to be quick, skip the explanations, just tally your points and scroll to the bottom to see where you rank!
- Do you have kids?
If yes, 2 points. If no, 0 points.
This one may seem super obvious, but it still needs to be said. You are responsible for little humans and I’m guessing those little humans cost a pretty penny. Not only that but if I lose my job, it’s not great, but it’s also just me. I could eat ramen forever if I had to – and I wouldn’t even really hate that. I can also work insane hours freelancing or easily pick up and move to another city for a new job opportunity. If you have children, all of these decisions are not impossible but certainly more difficult. So build that larger buffer into your emergency fund so you don’t have to make tough decisions later.
- Do you have a pet?
If yes, 1 point. If no, 0 points.
People overlook this one. Like way too often. One of the main reasons that I am not a dog owner right now is that I am not able to fully fund my emergency fund (or pull a Des over at Half-Banked, and create an entirely separate emergency fund for your pup). I cannot even explain the number of things that can go wrong when you have an animal.
Exhibit A: Several years ago, our family dog broke her leg when she was jumping around in excitement and landed on it funny. I kid you not. Anyone want to guess how much that surgery cost? Those were grim times, my friend.
If you have an animal, you need a bigger emergency fund. Period. You don’t want to be faced with some pretty awful decisions if something ever happens to your pet.
- Do you have a common-law partner or spouse?
You have a partner and both work, but could live off of one income: 0 points
You are single: 1 point
You have a partner but your income is integral to your household: 2 points
This one can go both ways. Having a partner can provide additional economic stability. Living in a dual income household, for instance, may cushion some of the blow if one of you is laid off. In a partnership, however, you also have a greater financial responsibility toward another person – another person that very well might heavily rely on your income. So this needs to be weighed depending on your unique situation to figure out if having a partner means you can have a little more wiggle room and need less of a fund…or if having a partner might be all the more reason to build extra cushion into your fund.
- Do you have reasonable job stability?
If yes, 1 point. If no, 2 points.
Okay this is relative, but hear me out. If you have a permanent full-time position as a public servant, you are relatively secure in your job. It is hard to get fired as a government employee, at least in Canada. If this is you, you may not need to plan as much for very possible job loss that people in other fields might face. If you are in a field well known for transitions, high turnover, trimming the fat – well then yes, you will probably be laid off at least once in your career, and you should plan for that. You may also have less stability if you are a freelancer or in short-term contract or consulting work, so having a bigger cash buffer might grant you a lot of peace of mind.
- Do you have a high savings rate (>30%)?
If yes, 1 point. If no, 2 points.
If you are consistently saving at least a third of your income, you may not need as big of an emergency fund. There is still value in having a cash buffer, but if you are usually saving hundreds or thousands of dollars a month, you may not need as much in your emergency fund. That’s because you may be able to absorb some pretty hefty unexpected expenses within your regular monthly budget.
Let’s say that I am hit with an unexpected $500 dental bill. That sucks, but I could cover that without dipping into my emergency fund. I would just defer some of the extra money I normally put toward my debt repayment or savings and use it for that one-time expense. So if something does happen – a car accident or repair, a dental emergency, an insurance deductible – but you feel like you could cover it with relative ease by not making that extra payment on your mortgage or not contributing as much to your savings one month, then you may not need as big of an emergency fund.
- Do you have access to a severance, unemployment, or a good social safety net?
If yes, 0 points. If no, 1 point.
Again, this is somewhat subjective and will vary enormously on a case by case basis. Some folks can and should expect literally $0 if they lose their job tomorrow. In Canada, Employment Insurance (EI) will cover up to 55% of your average insurable weekly earnings up to a maximum of $547 per week. Your EI can last anywhere from 14-45 weeks, depending on how many insurable hours you worked in the last year and the unemployment rate in your area. This is a pretty significant game changer. I would never advocate that someone rely on something like EI exclusively, but if you know that you will be receiving some income, even just $1,000 per month during unemployment, that means your emergency fund could last months longer.
- Do you have a high, medium, or low tolerance for risk?
If high, 0 points. If medium, 1 point. If low, 2 points.
Like everything else in personal finance, emergency funds are super personal. I hate the idea of having my money sit around in a low-interest savings account. I DO have an emergency fund but I have a pretty high tolerance for risk when it comes to most things finances. But for some people, having a cushy emergency fund is everything. I am all for this. Make the decision that makes you feel good. Who cares about a little bit of opportunity cost for having your money sit in a savings account if you feel that much better day in day out?
- Do you own a car or a house?
If yes, 2 points. If no, 0 points.
Things break. But when you rent, you don’t have to pay for them! If you own any significant piece of property like a car or a house, you need a bigger emergency fund. You can plan ahead for some maintenance expenses, and that’s awesome if and when you can. When you bought your home, for instance, you may have gotten a heads up that you would need to replace the roof within the next three years. Fabulous – plan for that expense and save up for it. But that does not change the reality that sometimes shit just happens, and your emergency fund will be the thing that saves you.
- Do you have other sources of income?
If yes, 0 points. If no, 2 points.
If you have any other stream of income, you do not need to worry as much about having a fully padded emergency fund. This could be income from a rental property, a part-time job, or a side hustle. If you are a freelancer and have a base of clients that you may not work with regularly right now, but know that you could reach out to or start pitching again if you suddenly needed more work tomorrow? That works, too.
The idea is that if you lose your job, you have some other streams of income still coming your way. Let’s say your barebones monthly expenses are $2,000. Traditional school of thought tells you that you would need up to $12,000 in your emergency fund to cover 6 months of living expenses. But if you have a decent side hustle that reliably brings in $500 per month, then you only really need to have $9,000 in your emergency fund, and you would still do just fine for 6 months in case of job loss.
- Do you have a cushy lifestyle that you could easily trim back?
If yes, 0 points. If no, 1 point.
Here’s the thing. I am not super frugal. Yes, I have got my finances kind of together, but I like beer and Starbucks and international holidays and we could keep going like this all day. Spending money can be demonized in the personal finance community, BUT the silver lining of being a spender who understands money is I know that if I have an emergency or I lose my job, I could cut my monthly spending by something like $500 per month pretty quickly. I don’t do that on normal months because I like my lifestyle. But if I had to, I absolutely could.
Now what does it all mean?
Alright, friends, tally up your scores and let’s see where you come in on the emergency fund standings.
|Number of Months|
Yes, I am still advocating that EVERYBODY have a minimum emergency fund of 2-3 months. If you don’t have that now, that is totally okay – I don’t either. But it’s something to start working towards.
The reason everyone in virtually all life circumstances can benefit from at least some form of emergency fund is because even if you scored very few points on this quiz, that only represents your life right now – and life changes.
You might be married now, but you might not always be.
You might not be a parent, but you might be soon – and that doesn’t always happen on the timeline that we expect.
You might think you’re eligible for EI, but then your claim gets denied.
You might love your job, or your relationship, or your whatever right now – but that might not always be the case. An emergency fund gives you peace and freedom to make the best choices if and when things do change.
So let’s discuss…what did you score on the quiz and do you think the number of months recommended makes sense for your situation? How many months do you currently have in your emergency fund? Are my numbers way off base here? Let me know in the comments!