How Much Do I Actually Need in My Emergency Fund?

About two months ago (um, how is it already May?) I finally hit my long-standing goal of fully-funding my emergency fund. Yay!

This was my longest-standing financial goal, because it had taken a backseat to everything else that was going on in my life. Buying a house! Saving for closing costs! Planning a wedding! Yikes.

My poor emergency fund just kept trucking along with its $100-a-paycheque contributions, which I also want to acknowledge is not nothing.

That’s about how much I could save, period, when I was first starting to save, and I’m proud to have kept contributing even when I could have easily been like “Screw my emergency fund, let’s buy a house.”

Do not do that, houses have emergencies too.

But the thing is, since it was never The Key Priority, I—true personal finance confession coming in hot—never updated what my savings goal was for my emergency fund. It’s been the same goal since I originally calculated how much I needed to save for an emergency fund.

Spoiler alert, things have changed a bit since then when it comes to my income and my expenses!

Plus, I’ve also learned a lot. Since then, I’ve read books, and blogs, and watched videos, that have all helped me refine my financial goals… but I never applied it to this one.

So in retrospect, I’m going to update what my emergency fund goal really is, by walking through the steps I’d recommend you look at now to figure out your own emergency fund goal.

Not because I’m re-evaluating how much I need to save, because I feel really good about my current set up, but I would like to know how many months my current savings would cover in the worst-case scenario.

First things first: what’s your emergency fund for?

I should say off the bat that I have three emergency funds. Pause for laughter, I know, that’s nuts.

The one I’m writing about here, and the one that I’ve recently fully-funded, is the one that I have as part of my “what if I lost my job” plan. AKA, it’s for if I lost my main source of income and still needed money to live my life and pay my bills. Mostly the bills though.

I think that’s also the one most people need to work on, because most people have a primary source of income, so we can safely ignore my dog’s emergency fund, and my house’s emergency fund for now (other than to say that if you have a dog or a house, they have emergencies too).

So, what are your basic costs?

If you lose your job, the easiest way to make your emergency fund last is to stop spending money like you have a job. That means that for a temporary period, you should plan on cutting most of the fun stuff from your budget, like the line items for restaurants, Sephora hauls, and other things along those lines.

Personally, I’d give yourself one gimmee, like leaving a line in for the occasional latte or networking event, but mostly, if absolutely no money is coming in, your optional spending should change pretty drastically to reflect that.

The things that won’t change are the basics. You still need a place to live, you still need to pay your bills, and you still need to eat (but you need to eat groceries, not a $40 meal at a restaurant every night).

Take a look at how much those totals add up to. Here’s a quick and very simplified budget example.

Rent: $800
Food: $200
Cell Phone: $50
Internet: $50
Hydro: $75
Restaurants: $100
Coffee: $60
Gifts: $100
Dog Food: $75
Donations: $50
Gym Membership: $50
Clothing: $150
Retirement Savings: $300
Emergency Fund Savings: $200
Vacation Savings: $100

Want to figure out how much you spend in a month?

Grab my track-your-spending starter kit, including the exact spreadsheet I use to keep tabs on my money, and emails to help you stick to it long enough to get the data you need!

What gets cut in a true worst-case scenario is up to you, but if these were your monthly costs, you’d be looking at a total of $2,360 on a regular basis.

If you wanted to save up enough to cover six months of expenses, that’s $14,160.

But if you’re willing to make some cuts, you could easily bring that down to a more attainable number. You could get this budget down to a bare-bones $1410 by cutting out restaurants, gifts, clothing, and pausing all three savings contributions until you’re gainfully employed again. That brings your new six-month savings goal to $8,460.

Much more palatable, right?

What other income could you count on?

Here’s the thing. If you’re thinking about replacing your income, and covering your basic bills if you lost your main gig, there might be other sources of money you could count on. The two biggest ones are money you earn outside of your day job, and benefits.

Do you have a side hustle?

If you earn income outside of your main job, that income isn’t going to disappear if you aren’t at your main job anymore.

And while there’s a case to be made that you could scale up a side hustle if you had a sudden influx of free time, I also wouldn’t count on it in these calculations.

For emergency fund planning purposes, assume you’d make no more from your side hustle than you do currently—but yes, go ahead and count your regular side hustle income in your emergency fund planning.

What government benefits are you entitled to?

This is going to differ based on a lot of things, like where you live and how much you earn, as well as how long you’ve been employed. However, if there are government programs in place that protect you in the case of job loss, like Employment Insurance here in Canada, and you’re eligible for them, it can provide a chunk of the money you’d need in an emergency situation.

Now, these programs aren’t perfect. In the best of cases, it can take a few weeks between when you apply for them, and when payments start showing up.

In the worst case, your claim might be denied for some reason, or there could be errors that hold up your payments for months. Yes, that happens.

But most of the time, they do work as intended, with a little bit of legwork on your part to fill everything out properly. It’s totally acceptable to account for them as part of your emergency fund planning, because that’s the whole point of them.

A few things to keep in mind about government benefits…

  • They depend on a lot of factors. In Canada, how much you qualify for is dependent on yes, how much you earn and how much you work, but also the unemployment rate in your area. Because of that, figuring out how much you might get, and for how long, is tricky. If you’re guesstimating, err on the side of counting on less than you think—or talk to a pro if you need exact numbers.
  • They might be taxable. Again, this is based on the Canadian programs, but when you receive EI payments here, you’ll owe taxes on them. Some taxes will be taken off at the source, but depending on how many benefits you receive, and your income for the rest of the year, you might owe more at tax time. Just something to keep in mind!
  • They’ll usually get clawed back if you earn money. If you’re trying to account for a side hustle and benefits payments, it’s important to remember that most benefits will be clawed back if you’re earning money. Personally, I’d much rather “lose” the benefits if my side hustle could support my expenses during a time between jobs, but IDK, maybe that’s a concern for you? It’s something to keep in mind either way.

So bringing this allllll back to our previous example…

You’ve decided you need $1410 a month in an emergency situation, to cover your bills and a few extras. Your savings goal based on that number is $8460, to fund a six-month emergency fund.

But let’s say you make $100 a month from a side hustle, and you would qualify for $800 a month in government programs if you lost your job.

All of a sudden, your emergency fund only needs to cover the shortfall between what you need—$1410—and what you’d have anyways, which is $900. To be fully covered for six months, you’d need $510 a month, or $3060 in total.

All of a sudden, getting your emergency fund to a place where it could save your butt if you lost your job seems in the realm of possible, right?

But remember, we’re worst-case planning here

Maybe I’m just risk-averse when it comes to cash flow (I am, I definitely am) but just because you can aim for a lower emergency fund number doesn’t always mean that you should.

There are plenty of cases and to be honest, horror stories, where someone was counting on benefits or side hustle income that didn’t come through. In those cases, having a larger emergency fund wouldn’t have been a bad thing, and there are pretty much zero cases in which you can convince me that having a slightly-too-big emergency fund is a bad thing.

I’m sure people will try—the stock arguments are “but you could put your money in the stock market!” and “you could pay for an emergency on a line of credit!”—but I’ve heard them both and I’m not into it.

But if you’re just starting to save an emergency fund, especially early on in your career, the numbers people throw out there are so heckin’ daunting.

Six months of expenses?! Half a year?! $10,000???

The most encouraging thing that you can do as you’re starting to map out how you’d handle an emergency, and setting goals for your very first emergency fund, is to remember that your emergency fund is only one tactic to handle a job loss.

Your full emergency plan might include scaling up your side hustle, getting a part time job, applying for those government benefits, cutting back on your expenses and relying on your emergency fund.

By figuring out what your overall plan is, you can set a much more realistic—and much more attainable—goal for your emergency fund, and you can do that without pulling the whole “Well I’ll never save $10,000, so I might as well just call it a day at $100” move.

I mean, that happens, so hopefully this helps you avoid it.