Recently, I’ve been thinking about how I written a lot about personal finance over the years. I just came back from a financial conference with thousands of people who produce tons of personal finance content (including video and podcasts) every day.
That’s a lot of talk… and as Aerosmith’s Steven Tyler says:
Talk is cheap, shut up and dance
So today, I’m going to channel my inner Suze Orman. I’m going to assign you homework. And you better do it!
Check your emergency fund. That’s it. If you don’t have one, today’s assignment is easy: START ONE
Don’t be worried if you don’t have one. Don’t even be worried if it isn’t much. I’ll let you on a tiny secret:
I am embarrassed by how small our emergency fund
I’ll get to those details on that in a bit… we have an unusual, complex situation.
First, I want to help you figure out your situation. Then, if you are still interested, you can get your voyeurism on and read about mine. But only if you finish your homework. If you don’t eat your meat, you can’t have any pudding. Sound good? Let’s go!
How to Calculate Your Emergency Fund
To put it simply, an emergency fund is how much money you have in cash divided by your monthly expenses. If you have $9,000 in cash and spend $3,000 a month, you have an emergency fund of 3 months (9000/3000 = 3).
It’s usually easy to figure out how much cash you have. You look at your bank account(s). It’s tougher to figure out how much you spend. Did you eat at too many restaurants too much this month? Did you have a minor car repair? Did you find a big sale on chicken?
Those links above were a test to see if you are getting distracted from the task. I hope you didn’t click on any of them. You can always read them when you’ve finished.
To make calculating expenses easy, I’m inventing my own rule of thumb. What did you expect from Lazy Man, right? On average housing and transportation are half of people’s expenses. You may not be average, but you’d probably know if you aren’t. Thus you can roughly add up your monthly house payment and car payment and double it. So if your rent/mortgage is $1500 a month and your car is $300 a month it would $1800 a month or doubled to $3600. (Doubling accounts for things like food, gas, utilities, coffee, food for your monkey butler… whatever it is.
While rules of thumb may not be accurate, this whole exercise is about creating an estimation. I’ve found that this is the best way to get it done quickly and easily. For me, it works better than getting bogged down in the details until…
Hopefully this rule of thumb can get you to an estimation in 5 minutes or less.
How Much Emergency Fund is Enough?
This is a question that is debated constantly. Most people say 3-6 months of your typical expenses. Some like more security and that’s okay too. Let’s aim for the 3-6 months, because many people don’t have that.
Also, you can always worry about “more security” after you have “security.”
Did your calculation give you more than 3 months? I hope so. If not, you may want to consider it as your next money goal.
Our Emergency Fund Situation
I can’t assign you homework that I wouldn’t do myself. So here’s a little analysis of our emergency fund. I’m not giving you all the numbers, but you might be able to estimate them from the context.
Our emergency is about 6-7 months, so it isn’t as small as I thought above. It is above average, but it feels small. That’s probably because it comes with a lot of “but”s. (I warned you it was complicated.)
Our expenses are very large between three rental properties (all at 15-year fixed mortgages), our own primary residence (same 15-year fixed mortgage), kids’ private school, and other stuff like food, transportation, utilities, etc. We are fortunate that those last three are limited. Our cars are paid off. I’m good at putting together cheap dinners (now is a good time to click on that chicken link above). Our paid-off solar panels eliminate our electric bills.
However, if we lost a tenant (or two), our emergency fund would drop quickly. In the above, I assume our renters all pay their rent. That’s a bad assumption for an emergency.
Also, our cash is split in a lot of different accounts. It feels less because I have to keep some money in certain accounts to keep them from getting overdrawn. There’s not just our personal accounts, but our joint account, the business account for this website, the business account from the rental properties. More than a month needs to sit there to avoid fees. I put that money in and try not to even think about it. In a true emergency, we can get at it, but it doesn’t feel the same as if we a big account with $40,000 in it.
Additionally, and fortunately, we have quite a few different income streams. The diversity of income is, in a way, its own emergency fund. If I’m fired from one job, I have 3 others. That’s why our emergency is complicated.
Extra Credit
If you’ve finished all that, I have some extra credit for you. Simply leave a comment below with at least 50 words about your emergency fund and/or thoughts on emergency funds in general.
I’ll put what I consider to be the best 5 comments in a virtual hat and pick a winner at random. What do the winner get? A $20 Amazon gift card.
Though I do keep track of my Emergency fund as a running bucket within my budget, I know that I also have a bit more safety net due to the other ways I structure things.
First, I live off last months income. This means that in the case of a big emergency, I can knuckle down immediately, clear the paid in full credit cards and start operating on cash ASAP.
Second, I’m also saving for a lot of periodic bills that can just be dropped in the case of an emergency, thus releasing more cash for operating; some will even send back a refund if I cancel early.
Third is that I track what my PTO bank would pay out (after taxes mind you) in the case of being laid off as this would also be supplemental operating cash.
Lastly, as a YNAB user with the toolkit, I also get the Age of Money and Days of Buffering metrics within the program. According to my AoM number, I’m actually spending dollars today that I earned over 3 months ago.
With all that, I’m pretty sure I can make what I have at any given time stretch out to between 5 and 6 months.
You know you had me at gift card contest! Ha. Ha. We don’t have a separate emergency fund, but we do keep a bundle of money in cash in our brokerage account. Thankfully we haven’t need it to touch it, but we know it’s there if we ever need to access it. I think there is $50,000 in it right now. We also have plenty of investments we could cash out if we desperately needed to. This is going to sound crazy, but I also have a wad of gift cards I consider emergency savings. I didn’t do this on purpose, but we do have a bunch we never seem to use for places like Amazon, Whole Foods and local restaurants. I feel like we could burn through that pile to feed ourselves for awhile if necessary. Most of them were given as gifts, but for some reason we never seem to remember to bring them to the store with us. When I win this Amazon gift card I’ll add it to my pile ;)
I’m still trying to get a handle on what I spend in a month but as best I can tell my emergency fund is at a little over three times what I spend. Of course in a true emergency, I’d cut back my spending, so it’s probably more like 4-5 months’ spending. Hard to say for sure as a home- and car owner when anything can break at any given time.
I’m slowly growing my eF by about $200 a month because I do want it to be bigger but I have more pressing goals like catching up on retirement (inasmuch as that’s possible). So for now that progress will just have to be enough.
You’re rule of thumb doesn’t work for me. Mortgage is paid off. HOA/taxes run $350. Car payment is $200. $700 is doable if I eat ramen, don’t drive and never run the A/C. I could get by on $1500, $1200 if I eat cheaper food Which would put my emergency fund at about 33 months. 8 months of cash and 25 months in a 60/40 stock/bond mix.
Thanks. I tried to note that there will definitely be outliers. Our cars are paid off so that’s a zero for us. I figured that people who have paid off their mortgage and/or cars would be wise enough to not take that short cut.
Looks like you have a pretty good situation there.
We decided that our comfort level meant that we wanted to be able to cover a year’s worth of expenses. But then we ended up putting away almost double that.
Here’s how my math problem went so wrong…
When people calculate their expenses for the year, we base it on what we either currently spend or some bare-bones “oh poop!” version of what they imagine. But if I lose my job, we also lose our healthcare. That new cost is kind of a wild card. I also start thinking about what happens if I lose my job *and* have to cover my home owner’s deductible (like when part of our roof and our entire shed got ripped apart in a microburst). So yeah.
I kind of flunked your homework assignment :p but our emergency fund size is what lets me sleep at night so I’m OK with it!
(Also, I tried to post a similar comment from my phone yesterday but the interwebs ate it. I did the assignment incorrectly AND I’m late. Oof.)
Healthcare is a huge mess. I’ve written several (4+) articles about it. Most of my articles are about our personal finance journey and because my wife is military, we have extremely good healthcare options for life. I personally believe in Medicare for all, but I don’t want to be political in personal finance ;-). (For readers who don’t know, there is a question of how much politics should play into personal finance.)
I’m certainly not one to be a teacher. I wish I had your practice/skill/aptitude/etc. in that area. However, if I were to try to pretend to be one in the comments of a blog that I own… I’d go with this:
You didn’t fail the homework assignment (even though there was an emoji there) because you thought about it and have thought about it. You didn’t just think about it, but you went with the extra credit of explaining why it isn’t cut and dry.
I know you’ll be okay because you are focused on this stuff. It’s the other 99.999% of people that I hope to reach. This is still helpful for me to think about (not that I can do much about the situation.)
Ohhh, I’m all about having some homework. ?
While we were working and both had jobs, we tended to keep our checking account balance at about 3x our monthly expenses, or about $20,000. We didn’t have any specific schedule to check it though, so we’d often see it slowly go down to $15,000 and we’d realize we’d been spending too much over the last few months. Usually what we’d do then is disable the Vanguard deposits for a month or two and let the fund return to it’s $20k level.
Nowadays, our emergency fund is just…. weird. I left work, so we’re slowly drawing down now, but only at a rate of say $3k/month. Because of that, we’ve decided to keep 1 years joint expenses in our checking.
On top of that, I’ve been advised by my tax preparer to hold enough in cash so that if some long-term capitals gains I realized end up being reclassified as ordinary income on my taxes I can still pay that off (which means having another $50k set aside there).
We’re also doing something a little unique – both my wife and I keep 1 years expenses in our own private account. The idea is, this makes us both financially sovereign. It allows both of us to have full financial security outside joint accounts.
So, that means we have 3 years spending + $50k reserved for taxes.
If the market ends up doing a nose-dive, we might revisit this and go down to 2 years though, but that’s where we’re at for now!
So who won?
I also find it amusing that BOTH pickuppennies blogs posted!
I haven’t done it yet. I was thinking of waiting until next Wednesday to give some more time for people to respond.
I have a new goal, convince people to create blogs about picking up pennies. I figure if I can convince about a million people to do it, I’ll have a tremendous audience ;-).
In the craziness of this this past week, I almost forgot about this. I decided that the 5 best comments here:
1. Adam
2. Patrick
3. Penny
4. Abigail
5. One Frugal Girl
The Random.org generator came up with 3, so I’ll be sending a $20 gift card to Penny.