How Much To Save For Emergencies

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The following is the transcript of the video above, “How Much To Save For Emergencies”. Therefore, it may be awkward to read. If you can, I would encourage you to watch the video. Automatically generated closed captioning is available on the video.


So, there’s no doubt in my mind that you’re going to experience some sort of unexpected financial emergency at some point in the future. It’s to be expected [that you’ll need to use your emergency fund].

Maybe you get a flat tire. If you own a home, maybe a tree branch falls through the roof of your house. If you’ve got a family member halfway across the world that’s not doing very well, you will fly out to see them. You are definitely going to have some sort of unexpected financial emergency at some point.

Beyond knowing what those are, you might be curious to know how much to save up for emergencies. Well, as you might expect, it depends. But, we’ll definitely go over some details and some guidelines, right after this. [Intro Video]

Hey there! I’m Adam Hagerman, your financial coach. And if you’re saying things like, “With my income, I shouldn’t feel this stressed about money!”, then you’re in the right place. This channel is all about helping you better understand your money so you can use it as a tool to help you achieve financial freedom.

And having a properly funded emergency fund can help you deal with a lot of those stressors along the way, in the least stressful way possible.

What’s a Financial Emergency?

You may be here today looking for a quick answer from me. Some sort of rule of thumb. But as you’ll find out in a future video, I really do not like rules of thumb. Because it’s different for everybody. Everybody’s going to experience different things financially.

But that’s not saying that I don’t have some guidance here for you. I do. So, if you remember from a previous video, truly unexpected financial emergencies usually fit into one of five categories.

  • unexpected job loss
  • unexpected home repairs
  • unexpected car expenses
  • unexpected medical expenses
  • unexpected travel

If you need a little refresher on that, watch the video here.

So when he gets down to how much you personally need to have in your emergency fund, you need to evaluate each one of those possible outcomes and say how susceptible am I to those things.

So for example, [the first category – unexpected job loss] if you work for the federal or state government it’s probably pretty difficult for you to lose your job. It takes a bit more to get fired from positions like that. And a lot of people hold on to those jobs. So if you have that type of job [a very stable one] you may not need to have a lot in your emergency fund allocated for the possibility of a job loss.

But if you work in the technology industry and you’re kind of just starting a job at a new company, then you might have a higher susceptibility to the potential job loss in the future. Because you’re kind of low person on the totem pole at a new company, maybe it goes out business, so you might need to have more in your emergency fund for that category. So remember for each one of those different categories, to say, “how susceptible am I to that?”

Continuing on to category number two [unexpected home repairs] if you rent you don’t need to have anything in your emergency fund allocated towards that possibility of a tree branch falling through the roof of your house, because you’re not a homeowner. If a tree branch falls through the roof of the place that you’re renting, somebody else is going to pay for that and fix that (hopefully). It’s not going to be you that pays for that thing, so you don’t need to worry about that.

But later on in your life, if you do become a homeowner you need to go back and re-evaluate your emergency fund at that point to say, “do I need to add more to my emergency fund because of that additional possibility?” The answer to that is a “heck yes!”. You need to add more money to your emergency fund for that possibility [unexpected home repairs].

How Much to Save

Now I may not like using rules of thumb, but I certainly do have some general guidelines for you. [There are] thresholds that I do recommend that you least meet in the process of saving for your emergency fund.

If you go back to my 9 Steps to Financial Freedom you can remember that the emergency fund actually makes two separate appearances.

It first shows up in step number four, save a little cash. So this is if you have debt, that you going to be working on paying off aggressively, I recommend just having a small emergency fund in place first, before starting to attack that debt.

And my recommendation there in step number four is about 1 month worth of your essential expenses. So kind of saying, if you had one of those true financial emergencies and needed a dip in your emergency fund, I’m sure you’d probably cut back on the dining out expenses, you wouldn’t go buy a whole bunch of clothing, and go do a whole bunch of entertainment type things. You’re going to focus on that emergency and getting back on track.

The emergency fund then also makes an appearance in step number 7. This is we’re going to be building upon that small emergency fund to build a larger emergency fund.

My recommendation in step number seven is three months of your essential expenses and then anything above and beyond three months [is determined by you]. So I’m not going to give you the standard “have three to six months saved up and you’ll be fine or have one year”. I’m going to say three months at a minimum. Anything above and beyond that though is up to you and how susceptible you are to those true financial emergencies that we’ve outlined.

So, are you highly susceptible to job loss? Yes or no? Do you own a home? Yes or no? Do you have a car that’s 20 years old or a car that is brand new and you have a warranty on it? Those things will play into what you personally need to have in your emergency fund beyond that initial three months [of your essential expenses].

And just remember from earlier that what you need today is probably going to be different later on in the future. You may go through this exercise and say six months is probably good for me, but then maybe a year later you purchase a house. Maybe then that six months needs to be seven months. So just realize that you’re constantly going to have to come back to this and evaluate it periodically.

Separate Your Funds

As you start funding your emergency fund, make sure that you are keeping track of that money and that it’s actually assigned to your emergency fund. Use budgeting software, use separate savings accounts, etc. to say “this is my emergency fund for those truly unexpected expenses only”.

Remember that it’s not for anything else. It’s not a slush fund being built up for other things. It’s for a true financial emergency, so you definitely want to separate out those funds.

Now, if you’ve also been saving for a couple of years and think you have your emergency fund in place and now you look at the amount of money that you saved and you say, “I need three months of my expenses for my emergency fund, but I’ve got six months 6 months saved up.” Take that additional 3 months and separate it from the emergency fund and use it to fund some of your other goals. Or maybe you’ve got six months saved up and you’ve got some credit card debt still. Take that lump sum of money and pay it off.

Because you already have a budget in place at this step, you’re now going to be able to realize that you’re saving up for the things that you need to. You’re probably not going to need to dip into your emergency fund that much, so you can probably feel more comfortable about taking a lump sum of money from there and applying it to the debt or apply it to other financial goals. You likely won’t have as many emergencies as you may have thought you had in the past.

Using Your Emergency Fund

If you have a truly unexpected financial expense and you need to use a bit of your emergency fund to pay for it, use the money to get you through that situation and then build it back up as quickly as you possibly can.

So if we’re talking about dipping into your small emergency fund here and you’re now paying extra on your debt, then stop that and use those extra payments on that debt to build an emergency fund back up as quickly as you possibly can. Once you hit that threshold again, then go back and start paying extra on the dead at that point.

You don’t want to do those things simultaneously because it can get frustrating as it can extend each of those things out for a longer time. And it’s going to feel more frustrating to do that [pay on debt at the same time]. So as you start building back up your emergency fund, whether it’s your small emergency fund or larger emergency fund, always remember that it is for truly unexpected expenses things that you absolutely did not see coming.

If you find yourself dipping into your emergency fund frequently, be sure to evaluate that expense and say is that truly unexpected? If it’s not, it’s now something that is expected. Something that you need to budget for and save for separately, outside of that emergency fund.

If you’re new here, make sure you subscribe to the channel to get yourself some weekly videos on personal finance. As always, remember that you deserve financial freedom. Take care of your money, so it can take care of you later. See you next time!

Now get out there and take care of your money, so it can take care of you later.

Your financial coach,