What are your emergency fund rules?

FB @ FabulouslyBroke.com

– February 23, 2010Posted in: Money

Many people said something along the lines of: NOT TO BE TOUCHED unless in a REAL emergency, which is the rule I subscribe to.

Others said: Only to be touched when rent has to get paid for example, but that to me is more “Savings” than “Emergency Fund”.

But what I am interested in are the rules.

Do you have a set $$ amount, like $10,000?

Or do you have an idea of 6 months worth of expenses ($1500 x 6 months = $9000)?

Here are some ideas I’ve had lately about EF rules:

EF Option #1: 2 years worth of savings

As a freelancer, my emergency fund threshold has to be a lot higher than 3-6 months.

I need about 2 years worth of living expenses saved to feel safe, especially since there MAY be times where I won’t be able to work for an entire year.

24 months x $1500/month* = $36,000 at least

*This is an estimate. I spend about $700/month in bare expenses, so $1000 should cover it and still give me room to breathe for dentist appointments and other one-off expenses, but I like being overly conservative.

I find this to be a good minimum, considering that I COULD live on $700/month, which means I am saving about 4 years of bare expenses, assuming I don’t see the dentist or doctor (er…!)

EF Option #2: Straight cash figure

I am thinking of $50,000 for some reason, but maybe it’s just because I like round numbers.

I find this to be a waste of interest, meaning it’s just sitting there in my (high) interest savings account, earning no more than 1% – 2% a year.

I am not thrilled about having that much cash sit idle.

Then I have to figure out WHERE I want to save it:

A) Keep it all in cash and throw it into a “high” interest savings account paying 1.2% – 2% a year?

B) Throw a percentage of it (half maybe?) into 5-year GICs paying 3% a year?

I also have to think about maxing out my retirement funds ($5000 in the TFSA for this year and $11,000 (?) into my RRSPs).

So, thoughts? What are your rules?

Update: Thank you to Caleb for catching my horrible typo in the title of all places!!! What ARE your emergency fund rules is correct, not “What’s”, because What Is = refers to “Rule” (singular), and I am asking for “Rules” (plural).

Forgive the idiocy. It was an ad hoc post done after an 11 hour workday.

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Tags: Emergency Fund, Money, Rules

About the Author

Just a girl trying to find a balance between being a Shopaholic and a Saver. I cleared $60,000 in 18 months earning $65,000 gross/year. Now I am self-employed, and you can read more about my story here, or visit my other blog: The Everyday Minimalist.

aguest

I just put our emergency fund into a bank with a high-yield reward checking account. You can google to find out more info on these types of accounts and see whether it's a good idea for you or not.

The rate is 4%. There is a maximum amount you can put into the account. Also, you have to do one direct deposit or bill payment per month. And, 10+ transactions with their VISA debit card per month.
Lou

Laddered CDs is my answer. Once the base line oif 6 months living expenses is reached, take out $1K and buy a CD. Every 3 moths buy a CD, then start increasing the time line on the CDs, so that the rate of return increases. Over a year or two, yo9u can have a CD coming due every month, available for cash if you have an emergency, or to be redeemed and the cash recycled into a new CD.

http://www.FabulouslyBroke.com FB @ FabulouslyBroke.com

I think I might do that, just with GICs in Canada (same as CDs).

http://www.lastbornchild.com Last Born Child

Great minds huh? lol. I'm not with the traditional emergency fund. At the moment, I feel my money will go farther in stocks and shares. I do like the sound of six month's worth of savings to maintain a similar lifestyle to what I have now.

If GICs (sorry, I'm unfamiliar with them) are like Certificates of Deposit with laddered maturity dates, that sounds like a great option

http://www.FabulouslyBroke.com FB @ FabulouslyBroke.com

Yes!! GICs are just like CDs

http://twitter.com/financialuproar @financialuproar

I really think that people have too much $$ in their emergency funds. Having a year's worth of expenses sitting in a bank account earning 1% interest is silly. What I propose is having 3 months of expenses in a savings account, then investing the other 9 months worth of expenses into some ultra conservative corporate bonds (or real return government bonds) that will have very little in price fluctuation. That way, if a real emergency comes up, you can deplete the liquid cash and have the investments as a backup. Someone can very easily get a 4% return on those, resulting in hundreds of dollars a year in additional income without taking on much more risk.

http://www.FabulouslyBroke.com FB @ FabulouslyBroke.com

I’m thinking that 5 months is what I need as expenses, or 6. I don’t work the entire year, and projects are usually 3-6 months in between each other.

http://intensedebate.com/people/Steph Steph

My EF goal is around yours…the 2 years = $36k. I haven't gotten there yet, but once I reach that point, I'm going to fully move on to my other savings goals, and pay even more towards debt.

I think I'm overly cautious with my Emergency fund estimate. But I guess that's the worrier in me. As for what constitutes an emergency, I'd say if it was some large health/vehicle/required expense, I'd use that money. Also, if I were to lose my job, I'd tap into the fund, but use it basically as a replacement paycheck: have my savings account feed into my checking, at a lower rate than my paycheck went in.

http://intensedebate.com/people/FABULOUSLYBROKE FabulouslyBroke.com

I think an emergency for me is if I really cannot do without whatever it is.

Like my health, or if I need a battery for the car and my regular savings is not enough to cover it…

http://www.itsahero.com/ Rachel @ It's a hero

So I have a question for you… I've been thinking a lot about this. During college I got into some credit card debt. I recently took a job (six months ago) that has increased my salary. Greatly. This has given me the opportunity to almost pay off all of my credit card debt. It feels amazing! However, i also have student loan debt. (boo, I know, but it's there). So after I'm done paying off my credit card debt, would you recommend I A: stash all my cash into savings, just in case & continue to pay minimums on my student loans, or B: pay off student loans as quickly as possible without saving.

This post inspired me to ask this question… hope it doesn't make you feel uncomfortable.

http://www.FabulouslyBroke.com FB @ FabulouslyBroke.com

I’d personally do a mix of both: pay off your student loans above the minimums, and save until you have $5000 ($417/month if you can swing it), which will take you a year.

Then just put everything towards student debt

But that’s me. You might feel more comfortable putting everything into savings FIRST and just paying the minimums, just to get a cushion started, it all depends on how steady your job is and if you can get money really quickly from somewhere/someone else.

Emma

My goal was 10K – which is at least 6 months emergency fund, though it will stretch a bit more once my loan is paid off.

I consider it for real emergencies, but for me, that does include rent once in awhile. Unfortunately, I get my paycheques on Fridays, and it's not a direct deposit – I have to take the cheque to the bank, and I get a 5 day hold on any amount over $500 that gets deposited. Normally, I have enough in the account, but all my expenses come out around the 1st (rent, loan, metropass, etc), and if needed, I'll transfer the money as I wait for the hold to release my money, and then transfer the money back to my savings. I've only had to do that once or twice, but my preference is to leave it.

And, while my goal had been 10K, I do still want to max out my TFSA each year (while keeping my regular high interest savings account. I just feel more comfortable seeing that account continue to grow. Eventually, a portion of this money will be used to buy a home, but I have a while to go before I reach that goal!

http://intensedebate.com/people/FABULOUSLYBROKE FabulouslyBroke.com

So it's kind of like a revolving fund of sorts!

I think the TFSA is incredible. I need to max it out every year to take advantage of it
Nicole

Talk to your bank and ask them to waive the hold for your paycheque. I imagine it is a regular occurrence (2x/month, bi-weekly) and a regular amount. If you've been with your bank for a while, demand better customer service!

Kate

We did ours strictly by amount. It wasn't for any particularly logical reason, save that we managed to pay off 18k in debt last year with bloody hard work and we were feeling adrift without another goal, so we said 25k.

http://intensedebate.com/people/FABULOUSLYBROKE FabulouslyBroke.com

I'm sort of drifting too for goals other than just to work this year… hence why I am focusing my energy on thinking about EFs and retirement

http://frugalzeitgeist.blogspot.com frugal zeitgeist

My EF is $60,000 cash, or 2 1/2 years worth of living expenses. I'm willing to tap a couple of thousand temporarily if I can replace it in short order, but I won't go below $55,000.

http://intensedebate.com/people/FABULOUSLYBROKE FabulouslyBroke.com

I think that sounds about what I need to save, esp since I don't have steady work.

Do you put it all in GICs/CDs/Bonds that are laddered? Or straight cash?

http://frugalzeitgeist.blogspot.com frugal zeitgeist

Straight cash at the moment, but if interest rates ever emerge out of the basement, I'll ladder most of it into CDs.

Caleb

Grammatically speaking, the title of your post should be "What are your emergency fund rules?" Just having a little fun with you.

http://www.FabulouslyBroke.com FB @ FabulouslyBroke.com

Caleb you are SO RIGHT

Gosh. This is what happens when you do a post ad hoc at night instead of prepping it in WordPad and then posting it.

http://financialcatastrophizer.blogspot.com/ FinCatastrophizer

Well, I definitely treat it as a "ONLY FOR EMERGENCIES". I used to just treat it as part of my general savings money but lately I realized that it wasn't quite working so now I am working on building up my emergency fund. I plan to aim for 3 months of expenses and a super long term goal will be 6 months.

Have you thought about putting it in a GIC or something? That way if you needed it you can access it but not immediately so you may need a line of credit to tide you over for a few days until you can pull it out. Just a thought.
http://frugalscholar.blogspot.com frugalscholar

Like you, my father was self-employed for many years. I assume my parents had a hefty emergency fund because we lived about the same–whether business was bad or good. I have a bigger EF than I need–I suppose for psychological reasons. It just builds up "naturally" since I seem to be hardwired for frugality.

http://intensedebate.com/people/FABULOUSLYBROKE FabulouslyBroke.com

I think our parents have a lot to do with influencing us.

I think if given the chance, I could have been taught how to really save at a younger age. But if you just don't know what the heck compounding interest is, it can be hard to see the big picture.

I only wish someone sat down and said: If you save $1000 now, it's _______ in 20 years. Isn't that great!?

I may have taken my money more seriously at a younger age.

mudpuddle

I think, given the nature of my job and my skills, that I would feel comfortable with about a year's worth of expenses set aside. So, approximately 18,000. I wouldn't want to keep much more than that easily liquid, and lose the investment potential.

That said, I don't have an emergency fund right now. I own a home with a home line of credit that I would use in a genuine emergency. Smart? Maybe not, but given the equity in my home, and the other debt I'm trying to pay down (mostly student), I'd rather throw all my extra money at debt than set it aside in an emergency fund.

http://intensedebate.com/people/FABULOUSLYBROKE FabulouslyBroke.com

I am thinking of keeping a year's worth liquid, or maybe 6 months worth, and then putting the rest into laddered GICs/CDs

http://theasianpear.blogspot.com/ The Asian Pear

My goal is $30,000 as my Emergency Fund.

I calculated it based on the fact that my family needs $2,500/month for bills (mortgage, food, utlities, insurance, etc.) Multiply that for one year. I chose one year because that seemed like a good amount of time. In my opinion, 3-6 months is too short. When people are out of a job, most people are out for longer than 6 months statistically. So I chose one year.

This is NOT to be touched ever unless true dire need emergency.

I keep it in a high interest savings account as a TFSA fund right now. I want it to be liquid and flexible. If I need it I want to be able to pull it out and not be "charged" for it. I also know that by putting it in my TFSA savings account, it deters me from withdrawing randomly. As I won't be able to contribute that amount until next year so I'd need to reexamine whether or not it's truly an "emergency" or just a "want" or something "badly planned."

http://intensedebate.com/people/FABULOUSLYBROKE FabulouslyBroke.com

That is a good point about people not finding a job before 6 months are up. A year is more reasonable if it can be done.

http://www.krystalatwork.com krystalatwork

My rule is 6 months of living expenses! I eventually want to get it up to 12 months of living expenses, but 6 months makes me feel comfortable.
http://twitter.com/eemusings @eemusings

I have about three months worth, with just over half in an online account (would take probably a couple of days to transfer funds) and the rest in another online account with my main bank which is readily accessible.

It's highly unlikely that you'd need to access your entire EF at once, so I'd go for putting a certain amount in term deposits (staggered maybe) to get a higher interest rate.

http://intensedebate.com/people/FABULOUSLYBROKE FabulouslyBroke.com

That's what Revanche suggested too. Staggering the GICs (which are like CDs — they're guaranteed investment certificates) by 3 yrs and 5 yrs.

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What are your emergency fund rules?

EF Option #1: 2 years worth of savings

EF Option #2: Straight cash figure

Then I have to figure out WHERE I want to save it:

So, thoughts? What are your rules?

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