Controversial Opinion: Most People Probably Don't Need 6 Months in Their Emergency Fund

Updated: Aug 31, 2020

When I was going through the classes to become a CFP® professional, we learned all kinds of rules of thumb, including the one you’ve probably heard before, which is that everyone needs three to six months of expenses set aside in an emergency fund order to be considered financially “safe.” It might seem a little crazy for me to be saying this, especially in the middle of what could end up being the undoing of the American economy, but I'm hesitant to just spout the rule of thumb without a whole bunch of caveats.

Let's talk about the point of the emergency fund, then consider the likelihood you'll need it along with the optimal amount for YOU to have set aside as part of your financial foundation.

What the emergency fund is for

The emergency fund’s primary purpose is to get you through an unexpected loss of income while causing as little long-term financial damage as possible. It’s also supposed to give you time to adjust to a new reality should you have a permanent change in income status, allowing you to keep paying your bills until you’re able to reduce them through cancellation or adjustment of service, sale of your home or termination of your lease, etc. I like to say that you need enough to keep your credit score in good standing until you can get back to where you were pre-emergency.

So for example, let's say you are worried about being permanently laid off should the Covid-19 pandemic lead to a more long-term recession. How much do you think you would need in cash to pay your essential expenses until you can find work again? Depending on your skills and network, you may find yourself able to quickly start earning SOME income while you look for a new full-time job (if that's what you desire) or you may be able to quickly change your circumstances by moving, canceling services and reducing your financial needs to very little until you're back to full income.

So how much do you really need?

Honestly, it totally depends on your personal life situation. Back in the day when I was still figuring out money, I was single, renting a place and had no dependents besides my cat. When I lost my job a year in to my career, it was pretty easy to take my expenses down to just rent and Ramen while I looked for a new job. Worst case scenario, I could’ve paid my other bills on a credit card, then canceled my lease and moved home to my parents until I figured stuff out.

Would that have been desirable? Absolutely not — I was living in Cincinnati and my parents are in Northern Michigan. Blowing up my lease would’ve added to the financial woes and using credit cards to pay bills would’ve extended my debt payoff plan a couple more years down the road. Luckily it didn’t come to that, but I’m just being realistic about what could have happened.

When your life is a little more complicated, you’ll want more saved

These days a loss of income would be a little scarier in some ways and a little easier in others. On one hand, I own a home and am in my 40’s, so financial set-backs have bigger implications, and if there was an economic downturn, it may not be easy to sell the house if we had to.

On the other hand, I’m married so unless we were both in a situation where there was a loss or reduction of income, we’d still be able to pay the mortgage, I’d just have to put my love for sushi and Oregon Pinots on hold for a bit, and probably end up getting a short-term job that wouldn't be my favorite thing to do.

We currently keep enough in our emergency fund to pay the basic expenses for at least 3 months, more if things were dire (aka we’d cancel cable, sell our 2nd car and modify our lifestyle significantly if we had to).

Situations where 6 months (or more) would be the responsible thing to do

That’s my personal situation, but your life will dictate what’s best for you. Reasons you might want to strive for a more beefy emergency fund include:

  • You own a home that could potentially be hard to sell, which could be all homes if 2008–2011 is repeated.

  • You work in a field that is highly volatile or specialized, making it hard to replace your level of income should you lose it. This is the situation I see more often than any other: one parent loses their mid-level executive job due to downsizing or a corporate change and can’t find another role that pays the same. They either start doing consulting work until some other company is hiring, or they continue to piece together an income as long as they can, all the while adjusting retirement plans downward. (keep in mind, this often happens later in the career, when kids are still in college or before, and it’s really hard to make your kids quit their life just cause Mom or Dad lost a job)

  • You have a large family dependent on one income.

  • You have trouble sleeping at night unless you know you could weather a 6-month period of unemployment without making any changes to your lifestyle.

Think about how you’d react

It helps to think through practically what’s most likely to happen and how you would react, both financially and emotionally. It goes without saying that most people would be able to cut back spending big time if they had to, but what are the areas you’d still have to pay no matter what in order to keep your credit in good standing? That’s what you want to make sure your emergency fund can cover, at a minimum.

When you still need to get started

So what to do if you don’t have an emergency fund yet? First, you need to know how much you should be aiming for. If you don’t know what your monthly fixed expenses are, that’s a great place to start. Just the exercise of writing your expenses down can also help you figure out how much you can afford to save each month.

Then you just need to automate it by setting up a transfer to a separate savings account (ideally one that pays a higher interest rate that doesn’t charge fees for minimum balances) and forget the money is there. That’s what I did, starting with just $25 per paycheck. Having the account separate from my regular checking and savings was key, just because psychologically I was better able to keep the line drawn. Plus, having to wait a couple days to transfer money stopped me from impulse spending while my account built up.

Give yourself a break

Once I started saving, it wasn't just a straight line to $1,000 - it took awhile to let the money build up while I worked out my other spending habits, but eventually by adding little windfalls and getting better at planning for non-recurring expenses I was able to get to the magic $1k, and then it was like a snowball effect. If your efforts to start saving are more like one step forward and two steps back, I see you - it's part of the process. Just don't give up and make sure you're not beating yourself up too much.

The bottom line is, an emergency fund is your first line of financial defense against life’s little twists and turns. Even if you’re working to pay off credit card debt, it’s important to start your emergency fund to help you avoid derailing your debt pay-off plan should an unexpected expense arise. Your future self will thank you!

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