Here’s a horrifying fact. 46% of Americans can’t come up with $400 to pay for an emergency. Instead of an emergency fund, those people have to use credit cards, borrow from friends and family, or just… not pay for the emergency.
Scary, right? That means almost half of my countrymen are one fender bender, one slip on the ice, one infant with pneumonia away from—at best—massive debt. And at worst, massive bankruptcy. Homelessness. Abject poverty and desperation.
Think I’m being dramatic? I’m not.
My purpose in bringing up the nightmare that is living just above the poverty line is not to nag those who can’t afford an emergency. What kind of monster would belittle people so poor they have no way of saving themselves from one minor stumble on the road to making ends meet?
I’m also not here to advocate filing for bankruptcy multiple times (let’s say six) as a legitimate means of making emergencies go away.
Instead, we’re here to plumb the depths of one of personal finance’s most enigmatic puzzles:
How much money should you have in your emergency fund?
Consider your assets and dependents
If you’re looking for an exact number… I’m sorry to disappoint you.
It’s just never that simple! Your balance is going to be completely dependent on a number of factors individual to you and your living situation. Like a fingerprint, or your RuPaul’s Drag Race fantasy league team, the size of your emergency fund is unique to you and you alone.
Do you own a car? How about a home? A boat? (If you’re reading this, love of my life and favored spouse, WE ARE NOT GETTING A FUCKING BOAT.) Expensive property of any kind that would really suck to lose or damage? Even your good health? Great. Then you’ll want to account for that in your emergency fund.
This means you need to understand what your shit’s worth. If your car were totaled, how much would you need to have socked away to replace it? What’s your copay for a visit to the doctor?
You should also understand how much your shit will cost to fix in the event of the most likely accident. Did you buy a house with an ancient water heater? Maybe figure out how much that rusted hulk will cost to replace and start counting down the days.
Another factor is your dependents.
Do you have children? A spouse? Elderly family members or roommates who depend on you financially? A dog? A cat (which our calculations have proven to be the perfect pet)?
Your emergency fund should account for the accidents your dependents might wander into. And what their care and feeding will cost if something happens to you.
One thing at a time
I just named like… a bunch of really expensive things. “Holy shit. I own a house, a car, and 2.5 human children. I better sock away about $50k in emergency savings!” Not quite, my friend.
Emergencies (mercifully) don’t happen all at once. (They usually happen in threes, actually, but let’s put a pin in that for now.) The process of tallying your assets and dependents is not so you can add up all possible expenses and keep the total cost of every potential emergency on hand at all times.
Instead, use these numbers to make a calculated decision about the size of your emergency fund based on what makes you most comfortable:
- For the super paranoid: Bad things happen in threes, so be prepared to cover three separate emergencies at all times.
- The super chill: Be prepared to cover one of your cheaper emergencies at all times.
- The reasonable: Be prepared to cover one of your more expensive potential emergencies with your emergency fund.
Cover your insurance deductible
If all of that sounds bafflingly subjective, good news! There is one concrete, quantifiable number you can work with to determine the size of your emergency fund.
Remember how insurance works? We wrote about it here:
Part of the bargain you make with an insurance company is that you will pay a deductible in the event of an insurance claim. That deductible is the agreed-upon amount you pony up before the insurance company pays the rest of the claim.
So it follows that your emergency fund should at least cover your insurance deductible.
Last spring, a massive hailstorm swept through my neighborhood, decimating everything in its path. Baseball-sized rocks of ice smashed every window on the west side of my house, scraped the paint from the siding, mangled our gutters, and left my roof looking like the cratered surface of the moon. (Don’t worry, the dog is ok. He was cowering in the eastern side of the house.)
This was the moment we’d been waiting for! The reason we’d been paying home owner’s insurance for two years! Gleefully, I made an insurance claim. And the insurance company agreed to pay for fixing our house—a new roof, new windows, new gutters, new paint!
… less the cost of our deductible, of course: $2,800, or 1% of the house’s worth at the time we bought it.
But Miss Piggy didn’t raise no fool.
I read the fine print when we got our insurance, so I knew how much we’d be expected to pay if we ever needed to make a claim. I had that money tucked safely away in my emergency fund for just such a catastrophe. Thanks emergency fund!
Advanced emergency fund mechanics
As we’ve explained before, some people don’t need a carefully calculated and tended emergency fund. Those people are financially solid. They have steady incomes, frugal spending habits, fat savings accounts, and extremely careful and conservative long-term plans. Like Kitty!
Kitty uses her credit card as her emergency fund because she has a very steady income and robust savings for various other projects. In other words, she can pay that shit off before the debt itself becomes an emergency.
Kitty is a Level 19 Financial Paladin. She wrote about her emergency fund strategy here:
But if you are but a humble Level 1 Rich Bitch, you need yourself an emergency fund.
We also caution you to beware the Bacon Emergency. There may come a time when you feel tempted to use your emergency fund for something that’s not technically an emergency. Resist! Be strong!
Here’s a handy checklist for appropriate emergency fund usage (also some bacon gifs because we love you):
Then of course there’s the dreaded Curse of the Emergency Fund.
You know how it goes. You scrimp and save and sell your internal organs to fund your emergency savings. And then, as soon as you have your comfortable number tucked safely away in the bank…
The check engine light comes on.
The curse is that as soon as you’ve saved your emergency fund, you have a reason to use it. Because of course.
So what’s your number, Bitch Nation? How big is your emergency fund? And what kind of exciting disasters do you hope it’ll help you avert some day? Let’s have an emergency fund-measuring contest in the comments! Not nearly as fun as a dick-measuring contest, but so much less likely to result in pictures we’ll have to censor from the blog!