Thursday, September 30, 2010

How large should your emergency fund be when you are broke?

Today I was reading an old posting on a blog called Wise Bread, about the size of your emergency fund. As you'll notice, my current savings is at zero ("...point zero" - for those Howard Stern or Animal House fans out there). Anyway, I'm smart enough to know that I need to start growing my emergency fund. What I'm unsure of is how big I should grow it. Since savings accounts are currently paying next to nothing in interest, any extra funds I have at the end of the month, I'd almost rather put right towards lowering our high interest debt.

I do plan to set aside $100 (or more) per month into savings, but at what point will my emergency fund be complete so that I can begin putting that $100 towards debt? I've read different theories on this one. Some say 3-6 months worth of expenses should be your target. That would take me a very long time to do and I think it's a bit more than I feel I want to do at this time. Others recommend $1000 as a good start. I'm worried that $1000 may not go far if I were to lose my job, especially given that our rent is currently at $1375.

I'm leaning towards my emergency savings goal being equal to one month of expenses - to start. I would like to increase that in time, but I think this is a realistic goal to shoot for. A quick analysis of my budget tells me that one month of expenses is about $4500. Wow. That's not rock bottom expenses though. It includes our current cable package, cell phones, NetFlix, paying a little extra on our debt, putting some in savings, etc. If I had to cut some things out and live on the bare necessities, I'm sure we could lower those expenses some. For now though, I'll think I'll target $4500 as our new emergency savings goal.

My current plan puts me meeting only half of that goal by the end of 2011. That would mean December 2012 is when we'd hit our emergency savings goal target. Hmmmm, kinda far off for my liking, but I guess some goals are a little harder to achieve to than others. I keep telling myself that it's a marathon, not a sprint and that we'll get there. We'll get there.


  1. I have been working the Dave Ramsey Baby Steps for about 3 years. My emergency fund has been $1000 or less for the entire time. At first glance it doesn't seem reasonable, but it works out.

    If I lost my job today I only have $1000, but I also don't have $1300 minimum debt payment. I would be on the hook for about $400. I prefer this over having a large efund and large minimum payments.

    To reach your efund goal faster you may consider getting agressive and throwing everything you can to get it done.

    I look forward to following your blog.

  2. Thanks for reading and sharing what's worked for you. It's appreciated :)

  3. I just found your blog today, and I wanted to comment on this issue.

    I have struggled with this as well - I have settled on basically having a $0 emergency fund while I am paying down debt, reasoning that mathematically this is the quickest way to be debt-free. I know it is risky, and I had a $5k car repair (yup, you read that right!) that required me to go to my parents for help because I had no emergency fund.

    I think people who give a set rule (3-6 months of expenses) are not taking nuances into account. For example, could you go to your parents to borrow money if a need arose? Is your job pretty secure? Etc. I think you ultimately have to decide what makes you feel comfortable, and just stick to that.

    I look forward to reading your blog regularly and I am adding you to my blogroll. :)

  4. Sorry to keep commenting on your old posts, but I have only recently been made aware of your blog, so I'm going through and reading now.

    This post inspired me to make today's blog post a mammoth one full of rambling and pontificating.

    I have really enjoyed all the reading I've been doing; getting perspective from a variety of people has helped sharpen my goals.

  5. @ 444 - No worries, glad someone is taking the time to read the posts (old or new). Your comments are appreciated :)