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How much emergency fund should you have?

In New Mexico, we have a state question! “Red or green?”. This refers to the type of chili you would like in your meal. If you’re wondering my answer is green, every time! But the more important questions should be “3 months or 6?”.

We often hear that your emergency fund should be 3-6 months of expenses, but how do you know if you should have 3 months or 6 months or somewhere in between? 3-6 months can be drastically different and have different implications for how far you can weather an emergency. We’ll start from the beginning so you can confidently decide what works best for you.

Emergency funds are a savings bucket intended for those moments you couldn’t anticipate. Car repairs, a broken hot water heater, major medical events, and even unemployment. It’s all the things you didn’t see coming that came from behind and knocked you on your behind!

When you begin calculating the possible range for your emergency fund you will want to know how much your monthly expenses are. Let’s say your monthly expenses (not income) are $5,000 a month. At the bare minimum, you should have $15,000 saved up for that rainy day. If you are shooting for 6 months you’d be looking at $30,000 which if we’re being honest can be a little harder to swallow, but for now, we want to sit with that number and use it to strategize.

So, how do we decide how much you actually need? Here are a few things to consider.

  • What is your comfort level?

Here’s the thing, everyone’s comfort levels are different. Your responsibilities are different. And those should play a factor in how much you decide you need to save. If you are a single person, with very little monthly expenses and a stable job you may decide you can stay closer to the 3-month mark. Or, if you have a family with kids and a more complex financial situation the 6-month mark may be the way to go. Ultimately, I always ask participants, “How much money would make you feel comfortable if you found out tomorrow that you were getting laid off and needed to find a new job?” While theories are great, this is your real life, and like a good boy scout, we should always be prepared.

  • Do you tend to have a lot of unexpected expenses?

If you have a lot of unexpected expenses you may want to have a higher balance in your emergency fund. This could be you if you have someone in your family with chronic medical conditions or if you have a unique family sharing situation where you aren’t always in control of all the expenses.

  • What is the condition of your home, cars, etc?

When you live in an older home or drive an older car you are more likely to need repairs more frequently. Looking at saving for a home specifically, it is recommended that you save 1-3% of the home’s value every year for anticipated repairs and maintenance. If you are in an older home of course you would want to stick closer to the 3%.

  • Do you live in an area that is prone to natural disasters?

While we should always carry insurance for any natural disaster you anticipate in your region you want to be prepared for those immediate expenses you might incur should a natural disaster happen. Living in a disaster-prone area could indicate that you need more in your emergency fund.

  • Do you receive benefits at work?

While many employees get full benefits like paid time off and sick leave, part-timers, gig workers, or PRN employees may not. If you don’t get benefits you will want to have a bigger emergency fund so should you not be able to work you can supplement your own income.

Keep the momentum rolling

This is not an all-inclusive list my friends, there are many other personal factors that you could consider. This should get your mind thinking about some of the not-so-obvious aspects of life that have an effect on the longevity of your emergency savings and can influence how much you ultimately want to set aside.