I know what you're thinking -- but savings accounts and money market accounts aren't paying squat for interest and you're right. I agree with you but think of your Emergency Fund as insurance and not as an investment. Sure we'd all like to earn a little extra interest on our money but I'm willing to earn a little less for having the money available in case I need it.
Determining how much you really need to set aside varies by your own situation. Let's take a look at the different situations for our family:
Terry and Erika. Terry is serving on Active Duty in the Army. He and Erika have been married 3 years, live in an apartment, and drive a 2009 Honda Accord that they are making payments on.
Andrew. Andrew is serving on Active Duty in the Marine Corps. He's single, lives in the barracks and down not own a car.
Steffanie. Steffanie is a recent college graduate. She works two jobs, rents and apartment and drives a 2000 Nissan Xterra.
Donna and me. Donna is retired from the Air Force and works part time as a dental assistant. I work full time as a database administrator and software developer. We have a $225,000 mortgage and drive a 2001 Toyota Tacoma and 2006 Honda Accord, both of which are paid for.
Now let's take a look at how each should setup their own emergency fund:
Terry and Erika: 3 months of expenses. Because Terry is serving on Active Duty his income is very consistent from month to month and since he's planning to make a career of serving in the Army he should be fine with 3 months set aside.
Andrew: 3 months of expenses. Being single and living in the barracks his expenses are minimal. Coupled with the fact that like Terry his income is very regular and steady 3 months is plenty. Andrew has not decided if he will make a career out of the Marines. If he plans to get out at the end of his enlistment then he should bump his emergency fund up to 6 months. Actually he should bump it up to 6 months of projected expenses once he gets out. He'll have expenses for food and rent which he currently doesn't have now.
Steffanie: 6 months of expenses. Steffanie can't count on a steady income like Terry and Andrew can. While she can count on her hours at her primary job she doesn't work a set number of hours per week in her second job so her income varies quite a bit. Additionally owning a 2000 model year car is somewhat case for concern. We know the Xterra has been well maintained. It was our car before it was passed down to Steffanie. We know it was maintained properly but now that Steffanie owns it and we aren't there to remind her continually to take it in for routine service there's a chance that car will need some repairs in the future and mommy and daddy won't have the extra cash to bail her out because we're busy paying down our debt so that we can build our emergency fund.
Donna and Me. We've already planned how we want to fund our emergency fund and we're doing things slightly different. Because we are just starting to keep track of our expenses we don't know what our 3 - 6 months worth of expenses equates to. Yes we know fixed expenses such as mortgage, etc but there's always something that pops up that we haven't yet budgeted for. Since we don't yet have a good handle on our expenses we picked a dollar amount that when set aside would give is a great peace of mind knowing we were prepared for almost any emergency that comes our way. For us that amount is $25,000. I really want $40,000 or even $50,000 but think $25,000 is a good number for us. My employment outlook looks very good. I've been with the same company going on 14 years now and that's pretty much unheard of in the IT industry. Because Donna retired from the Air Force she gets a monthly retirement check. Being empty nesters we get to skip Baby Step 5 (College Funding for Children) and want to work on Baby Step 6 which is to Pay Off Home Early. (Yes we plan to skip Baby Step 4 Invest 15% of income into Roth IRAs and Pre-Tax retirement plans but that's a subject for another post).
Looking at it $25,000 seems like a big number and it is. I know that to fund that amount in a year I need to save a little over $2,000 per month assuming we start in January 2013 which is our plan. I get paid twice per month and Donna's retirement check is paid once per month on the first so our monthly income isn't a 50/50 split between the two pay periods. For us it works out to a 62/38 split. To make it easier on us we will deposit a larger amount out of the first paychecks and we will the 2nd one. The table below shows the break down we plan to follow. We talked about going ahead and using the $1000 that we have already set aside and counting that towards our $25,000 fund but decided against it so well actually end up with a $26,000 Emergency Fund.
| Planned Emergency Fund Deposits | ||
|---|---|---|
| Pay Period | Amount | Total | Jan 1 | $1,270.83 | $1,270.83 | Jan 15 | $812.50 | $2,083.33 | Feb 1 | $1,270.83 | $3,354.16 | Feb 15 | $812.50 | $4,166.66 | Mar 1 | $1,270.83 | $5,437.49 | Mar 15 | $812.50 | $6,249.99 | Apr 1 | $1,270.83 | $7,520.82 | Apr 15 | $812.50 | $8,333.32 | May 1 | $1,270.83 | $9,604.15 | May 15 | $812.50 | $10,416.65 | Jun 1 | $1,270.83 | $11,687.48 | Jun 15 | $812.50 | $12,499.98 | Jul 1 | $1,270.83 | $13,770.81 | Jul 15 | $812.50 | $14,583.31 | Aug 1 | $1,270.83 | $15,854.14 | Aug 15 | $812.50 | $16,666.64 | Sep 1 | $1,270.83 | $17,937.47 | Sep 15 | $812.50 | $18,749.97 | Oct 1 | $1,270.83 | $20,020.80 | Oct 15 | $812.50 | $20,833.30 | Nov 1 | $1,270.83 | $22,104.13 | Nov 15 | $812.50 | $22,916.63 | Dec 1 | $1,270.83 | $24,187.46 | Dec 15 | $812.54 | $25,000.00 |
Observant readers will notice that the last payment is $812.54. Coming up with an extra 4 cents during the holiday season is going to be tough but Donna and I will do it some how. I just know we will :).
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