Emergency fund? How much?


Moom started his Asset Allocation Series. So I guess it is not surprising for him to write about Emergency Fund (EF), and introduced us to English Major Money’s (EMM) post. This was also our first time to participate in Carnival with a post on getting more tax returns for international students. I happened to find a controversial post by “Broke Now, Rick Later” (BNRL) in the Carnival. So I will share my thoughts here.

First, no emergency fund needed? I have to say that I admire BNRL’s courage. For a single-income household with 2 kids and a mortgage to pay, he has extremely low liquidity of $282. And he was advocating NO emergency fund needed. Make no mistake, he is stacking away 20% of his income in retirement savings, which is unlikely to be ready available for emergency. So he is trading his emergency fund as extra investments in retirement account. Before reading his post, I thought there were few people as described in moom’s comment. Now I think that there might be quite a few.

BNRL has 50% income to cover monthly necessities and 20% for retirement account. Considering tax withholdings and other expenses, the remaining 30% is unlikely to have any significant portion left. BNRL argued that you can always count on 0% APR installment payment combined with a delay in payment to pull the cash you need from either your salary or disability income. However, he maybe forgot that sometimes, “when it rains, it pours”. What if there were two or three unexpected on his list on going at the same time?

Second, how much emergency fund do you need? I stand by the standard recommendation of 3-6 month expense and suggest everyone to look at his/her own situation like EMM did. The amount will depend on both your needs and your risk attitude.
Needs (expenses): take a look at the monthly necessary expense. For renters like Jacqui and I, ours is less than 20% of our gross income. Two months’ salary gets us covered for a year.
Risk attitude (or personal preference): remember, everyone get unlucky some day in life. That’s why we’re paying for health and car insurance. I am very conservative, thus, may want to insure for situations of very small probability, say three or four unfortunate incidents happening at the same time; you may be more optimistic and want to just insure up to two. However, you really do not want to have no or poor preparations for them as they do happen.

Last, I think having an EF is one necessary step for anyone to get started on investment and retirement savings. I will share my experience later.

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4 Responses to “Emergency fund? How much?”

  1. mOOm Says:

    I always invested the minimum required into retirement accounts, until last year I discovered the Roth. And then once I began to see my “taxable accounts” reaching the financial freedom level (with active trading) I began to invest the maximum in my 403b with the intention of eventually rolling it into a Roth. So my “emergency fund” has more than $200k in it 🙂

  2. mOOm Says:

    Some of the highest net worths on NetWorthIQ are obviously fake. I think others may prefer not to break things down based on the account type. Then for example say I am a stocktrader and make it big. The only way to make retirement contributions is to form a management company and then pay myself a salary from that management company. And then I am going to have to pay the Social Security tax which otherwise I would avoid etc. And I can’t do a Roth because I am making too much…. So these kind of considerations might explain this.

  3. Yannick Says:

    yes, i found out about Roth about 3.5 years ago. of course, i wasn’t qualified for other types of retirement account until this year.

    “I began to invest the maximum in my 403b with the intention of eventually rolling it into a Roth.”
    Yep, I’m waiting for 2010 as well. 200K is quite some EF, more than our total networth!

  4. Yannick Says:

    Thanks for the explanation. I had no clue that people would take the trouble to post fake profile. How did you tell which are fake? Maybe a post on it?

    Right, I thought 401K or SEP would be more significant than Roth, which high income people don’t qualify for it.


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