The question “how much money should I have in an emergency fund?” gets asked a lot.
Our answer is simple:
If you’re in debt, you should save 1 month of your expenses in a savings account. If you’re out of debt, save 3-6 months of expenses.
We’ll dig into why we recommend those numbers, but first, how do we calculate 1 month of expenses?
What is a “Month of Expenses?”
When it comes to saving for your emergency fund, you should ask yourself “If I lost my job, how much money would I need to survive?”
Take all of your necessary expenses for the month and add them up. The keyword to this is “necessary”. For example, if you’re out of debt and spending $500/m on dining out if you lost your job, you would likely want to cut this back or out completely. Therefore when you calculate what to save for your emergency fund, we recommend calculating it on your bare necessities.
So How Much Should You Save?
If You’re In Debt, Save 1 Month of Expenses for Your “Baby Emergency Fund”
Some people out there recommend just saving $1,000 for your emergency fund if you’re in debt. The issue with that is that Porscha and I felt this wasn’t enough and it made us feel very uneasy.
The reality is that a true “emergency” is likely going to cost you more than $1,000. If you lost your job today and only had $1,000 in the bank, how long would that last you? Chances are, that wouldn’t even pay your rent or mortgage. But, if you had 1 month of expenses, you would have a full month to figure out how to get more income coming in.
If Your Out of Debt, Save 3-6 Months of Expenses
3-6 months of expenses is a good goal. The amount you save is really up to you and how much you feel comfortable in saving, but we wouldn’t go over 6 months or under 3.
Again, if you lost your job, you should be able to replace a good chunk of your income within 3 months.
Buy Why Can’t I Save More Than 6 Months?
I mean, you could save more than 6 months if you wanted to, but we feel that’s excessive. We think that you need to start living your life after you’re debt-free. If you are constantly saving and not living, you’re likely going to burn yourself and your family out, and they will begin to resent you.
Life is short. You’re debt-free. Start rewarding yourself and live your life!
