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How Much Should You Have In Your Emergency Fund?



If I had a top ten list of questions, this would be in that top ten. Most people struggle with how much is enough. Pop Culture Finance tells you to keep 6 months of living expenses in that account. That is fine for a textbook answer (which are not always crafted for your particular needs in mind).


I would create your emergency account to prepare you for two main contingencies. First, there is the actual emergency or unexpected expense that occurs. The expense that if you are not prepared for that goes on the credit card because you were not prepared. That could be new brakes for the car, the AC system in the house needs major work, repairs of any kind that can't wait, etc.  


Ideally, you would have a minimum of $5,000 put back for the unexpected bill. If you were looking for a maximum amount I would speculate that a well funded emergency fund for Part I expenses would be $10,000.  


The second part of the emergency fund is the Part 2 income loss. For most people that would be a lay-off. For business owners, that is another topic of conversation. For the career or wage earner employee, you have to determine how many months of income should you want covered at PLAN B LEVELS. 


We have Plan A income that is covered when things are normal. When a lay-off occurs, we shift to a gutted Plan B income/spending plan that has cutbacks built into it. This is where we figure out a lower income spending plan. After all, we are not going to spend money like we are employed if we have been laid off. Then we figure out approximately how much we would get in unemployment income. We then come up with a PLAN B replacement income based on the deficit.


For example, lets pretend that we can get our plan B living expenses down to $5,000 a month. Let's say we are planning on $1600 a month in unemployment wages leaving a deficit of $3,400 a month. Let's say we figure out we need a 4 month run way to get a job so we prepare for 4 months of $3500 a month replacement or $14,000. That plus $5000 from the first part equals roughly $19,000.


Also a good plan in the meantime is to have a home warranty from a reputable serving company in place to help pay for those emergency repairs.


Once again, this is ideal. Just start saving with the intentions of building an emergency account. This is a process and not a one day event!