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.
My emergency fund is for living expenses (although this is a somewhat moot point in my case, as I am still in medical school and fortunate enough to be fully supported by my parents) and for emergencies like stolen bikes or phones, or broken laptops, or worst case scenario, all three in one month. Which means I should probably have at least 2700€ to cover that worst case scenario. I recently reached that goal, so now on to saving for living expenses…
Congrats on reaching the goal – that’s a big deal! I remember having to replace a laptop while I was in school, and it was not fun – but it was also incredibly necessary. If I’m remembering it right, I went straight from school to the Apple store, haha. There isn’t really a buffer period when you’re in the middle of classes and assignments and exams, which I can only imagine is even more true of medical school 🙂
We’re about 1/2 way to meeting our emergency fund goal of 6 months living expenses. Once achieved we’ll utilize this money if we were to ever have a life altering event or job loss. It’s important to remember that short term disability, maternity leave and bereavement only can sustain you for so long. Having that bonus net that many others don’t prepare for gives you way more flexibility in life.
Yes, yes, yes! I couldn’t agree more – even though people always claim that employment insurance or short term disability will be their emergency policy, there are just so many variables to it. I know up here in Canada we have different options available to us, and some that are really generous, but even so, it never hurts to have the extra emergency funds just in case. My favourite example is to ask people how they’d manage four weeks without pay – which is about how long it takes for employment insurance to kick in here if you get let go. The look on their face is priceless when they realize. I’m sure I’ve scared tons of people into saving a bit extra, haha.
I love this breakdown! You really have your goal down for your emergency fund, which makes it much more tangible to work towards. 🙂 Just like your last post, I commented & touched on how I also may recognize my emergency fund as my “opportunity fund” as well! I think I am a bit more lax when it comes to what I am saving for, just because I know in 3 years life can be drastically different (hence why, having an emergency fund is key)! I think you touched on a great point where your 20’s are definitely ex-pen-sive. Sometimes I feel like I have so many savings goals (emergency fund, retirement, house down payment fund, wedding, kids future tuition) that it becomes a bit overwhelming! I keep reminding myself that even if it seems challenging now, once I get through my 20’s building these foundation funds & working towards such goals will allow for my 30’s and on to be a lot more smooth sailing. To me, my emergency fund will always be a work in progress because I am unsure of what the future ’emergency’ may entail – but might as well be prepared! 🙂
Yes! I’m so glad I’m not the only one who’s sitting here like “Wait, I have five different savings goals and I STILL don’t have a savings account to cover car emergencies?!” It can definitely get overwhelming, so thank you for being there with me! I also take comfort in daydreaming about my 30s when all of these accounts will be fully funded and I’m set up to have no debt, haha.
And honestly, the work in progress thing is so real. I’ll probably hit the $8800 goal the same year we buy a house, and then realize how expensive house emergencies can get, and bump it right on up to like, $12,000. C’est la vie!
Hahahaha, oh, Mean Girls. Seriously one of the funniest movies ever.
Well, not only is this a great post, it exactly speaks to the question I was wondering about when you posted last week about emergency funds and getting fired and the license plate situation. I guess I’ve always heard $5,000 as a rule of thumb for a B+ emergency fund, and $10,000 as the A+ version (not sure how Canadian/U.S. exchange rates factor in here). It makes a lot more logical sense, though, to base your emergency fund on your actual expenses, or actual potential expenses, as you have done.
I have $5,000 in my emergency fund right now, but I also don’t have a car. Then again, I also won’t have a job after December 31st, because that is what happens when you finish your PhD. So I’ve been thinking lately that $5,000 may be a little low, as I’m not sure I’ll find the perfect job right away and I typically need about $1800 (if I’m being careful) to live and pay rent and buy groceries and toilet paper in a given month. There’s not a lot I can do about that now (since it takes a while to build up an emergency fund)…except to be really vigilant about looking for jobs!
Hahaha I’m pretty sure we just ignore exchange rates and use the exact same amounts, because I’ve heard the $5000/$10000 breakdown as well! It’s funny when I look at it that way, because my goal puts me at a solid A, which I can totally accept.
Also, can I just say, AS IF you have a PhD? That is the coolest, and the most impressive. You’re a doctor! I’m excited to see how your job search goes and I know you’ll find something exciting and amazing.
Super interesting! I love how you broke it down and explained your process. I don’t think people talk about this enough to be honest. For me, the answer was simple. I’ve saved 3 months of living expenses. I don’t have any other funds or accounts, but I do have about $3000 worth of cash available via credit cards, plus an additional $20,000 worth of credit available. So in the case of a true emergency, I would still have access to additional money. I chose three months because I know that if I lost my job, I could get some sort of job in that time. (I also know I could cut my living expenses even further, if I needed to). Most months, I also add an additional $200 to my savings accounts. But if I need to spend the $200 on something else (like in December, I’m planning an extravagant birthday for my partner!), then I don’t stress about it too much. Other than that, I funnel the rest towards my student loans. I’m interested to see how my financial goals change once my loans are paid off in March though!
Oh birthday parties are the best! I went way over the top for my boyfriend’s 30th… and then told him that next year he was getting a book, lol. You must be so excited for your partner’s birthday to finally get here! (I mean… no, planning birthday surprises is about the recipient, not about us…)
I totally agree on the job front too. After two months, if I didn’t have a new job, I’d probably just pick up a retail gig or something flexible to do until I found something else – I’d go stir crazy otherwise! There is only so much Netflix a person can watch.
Lastly, March is SO SOON! Taylor! That is the most exciting!
Man, this is like the kick in the butt I need to really look at my priorities. Right now, I have everything going into debt repayment, which is not bad, but I should reaaallly be saving some too.
I guess my way of looking at it is that I’ll have all of it to save once I finish my debt but considering I’ll need a good amount to fix my car before I can even use it…
I suppose step 1 is to follow your advice and figure out what my goal is first.
Goals are always the best place to start – what works for you might not be what “the general advice” is! I know I’ve heard so many different, conflicting things about how to manage debt and savings, and I think what it really boils down to is what matters most to you. If carrying debt is a serious stressor, then your current strategy might be the best one! But maybe setting aside a chunk of it for other priorities would be able to help you feel a bit more relaxed about those? Oh adulting, it’s never easy, eh?
I hope the post was more gentle-kick-in-the-butt and less “Egads, what now?”
Great advice, as always. For the longest time, we followed Suze Orman’s advice to have a full eight months of living expenses in our emergency fund, which we did eventually save up. But it was a lot. of. freaking. money. On one hand, that made us feel bulletproof, which was cool, but on the other, that’s a lot of freaking money to be earning basically 0% interest on. I wish Suze Orman spent more time talking about reducing your spending — then we might actually have thought about reducing how much we’d need in those imaginary 8 months and not tie up so much cash in a savings account. Oh well… We do plan to still have an emergency fund when we retire early, too, so that we aren’t forced to sell shares in a bad market or incur capital gains that would mess up our tax/health insurance situation. We highly recommend that approach!
That’s so smart – and I never realized it, but spending less really isn’t something Suze ever covers! I’ve read a few of her books and you’re totally right, I don’t remember anything prominent about that beyond some advice about the “right” ratios of what to spend and what to save.
And honestly, that is a brilliant and well-planned approach to early retirement! Unsurprising coming from you guys, *but still*. Kudos!
Fully funded but it’s lumped in with the rest of our savings, meaning that we only have one account for e-fund and other savings. In terms of what it is for, goodness only knows. Home disasters, car catastrophes, being laid off. I’ve always had $10k as a number in my head that I would keep untouched. I read a lot about different ways to calculate the proper amount, but $10k just *feels* comfortable. Because you know, everything in the finance world should be based on the feels. 😉
Hahaha I love it – when I run out of numbers to rationalize my decisions, feelings are an excellent fallback! No one can argue with feelings. Plus, your feeling gives you a VERY solid emergency fund!
Ours is a worst-case scenario three months of living expenses. So three months of what we spend on our basic mortgage payment (not including the extra we pay toward it), excluding things we could cancel like the cell phone, etc. Excellent breakdown!
That’s awesome Maggie – way to get into the details of it all! I have to admit, I didn’t do much to back up my “I’ll spend 80% of what I do now if I’m cutting back due to a job loss” assumption… but that’s Future Des’ problem. I’m sure I could find the savings though! If nothing else, telling people you’re out of work is a great way to get them to do frugal fun things instead of pricey dinners, etc.
We’re working toward an emergency fund, especially now with open enrollment on the horizon; for the first time, we’re considering an HSA as part of our strategy. We haven’t been keeping our fund fully funded because we’re paying off debt–it’s interesting trying to maintain a balance between the two. Your breakdown is awesome because you don’t take the cookie-cutter approach and simply say “save 3 to 6 months of expenses.” Great post!
Thanks Claudia! I’m definitely not into the “This is the amount, it’s the same for everyone, don’t take any other factors into consideration” approach, haha. I’ve read a lot of really interesting posts that have talked about balancing debt repayment with emergency funds too – one had a great point that if something bad were to happen, she could slow down debt repayment that month to address it, effectively using her overpayments on her debt as an emergency fund. It’s all about finding a balance that works for you!
Also, just from following along with so many US bloggers, I’m learning so much about the different accounts you guys have available to you! I can’t even imagine – we have enough people who can’t figure out our two relatively simple tax-advantaged accounts here in Canada!
This is great! You show so clearly how you figured out how much you need. I’ve started an emergency fund, but I haven’t got too far yet… and I didn’t really put much thought in to how much I should actually have… I’ll have to work through your steps myself and get a better idea of how much I should save.
I strive to get my clients to save 6 months of expenses in an emergency savings account because you really have no idea what emergency will transpire, but emergencies happen ALL the time. The larger your emergency fund, the less stress you will have in life when those emergencies happen. In just the past six months, I had one client experience a detached retina and couldn’t work for 3 months, another client’s fridge and oven broke down and it cost almost $2,000 to replace, another client had car trouble that cost $1,500 to repair. I know these things happened because they all texted me and thanked me for forcing them to have a healthy emergency fund. The healthier the fund, the less headaches you have in your future.
I have more then 12 months in my emergency fund… in fact my fund has about 3 years of expenses which is where my comfort zone is at
Hi, Desirae,
A great column – wish it (and p.c.’s) had been around when I was your age. Good advise on beginning an emerg. fund immediately; life always throws us a few unexpected curves, and Boy Scout pre-paredness provides financial/emotional relief. Know how tough it is to save when young, but if disciplined to put aside even $50/mo it will add up. Strongly rec. to put $ in a TFSA for emerg., and EQ Bank’s (non-solicited plug here) 2% daily rate is tops. Better than any Cdn GIC under 2 years that I am aware of; and tax-free/compounded monthly/available without penalty if emerg. should arise.
Thank you so much – and I couldn’t agree more on your recommendations for where to put the money! My emergency fund is with EQ Bank right now and the 2% interest is downright magical, especially as someone who’s only really lived through lower interest rate environments. “You mean you’re going to pay me HOW MUCH every month just to keep my money here?!” And ok sure, it’s only a few dollars, but compared to a few cents that’s great!
This post was originally published wayyyy back when I first started Half Banked, but I updated it because my new post was… literally the exact same topic 😂
It’s still a great topic and I love the way you’ve laid it all out. Not to throw a monkey wrench in there, but sometimes the emergency is that you become disabled, meaning you can’t work anymore, main job or side hustle. You may be eligible for disability benefits, but I can tell you that in the US, it can literally take *years* to be approved (it took my wife 2.5 years, fortunately she had private insurance as well). You may not be able to account for every emergency situation, but my point is that people shouldn’t take too many shortcuts with their emergency fund amounts.
I have two different funds. One is my emergency slush fund – which when gets over $5k or so I invest the rest in my RRSPs or pre-payment on my mortgage. This covers say – deductible on my insurance, oh crap I need new tires, type of emergencies. Liquid cash I keep in a high interest savings account and as I only have one it doubles as savings for vacations and such. I only feel comfortable when I have about that much money at hand.
My other is in a TFSA – mutual funds and is a “lose my job – or decide I need to run away and join the circus” fund. I am single and I want to have the freedom to say that I want to take a year off work and be able to afford it. Maybe my parents need me at home, or whatever. It is the freedom to say that I could leave my job for any reason that suits and I won’t be financially ruined. This is right now at about 6 months of my take home salary and I hope to have to 12 months of my take home salary. And if I never need it for that – it will add to my retirement savings.
I have worked hard and saved hard and – all things going to plan – will have my mortgage paid off in 5 years. I never thought I’d be mortgage free at 45 but that is how it is looking.
I think being single and not having someone to rely on to help if something bad happens has really driven me to be a saver so that I know I can always have that independence.
That is SO awesome Pam, congrats!!
Hi Des, I want to ask you: where do you put your emergency fund? in separate bank account?
Yes! I have it saved in an account with EQ Bank—they’re Canadian, and they offer high interest rate savings accounts. I keep it there so I don’t see it every time I log in to my “regular” bank account, and I earn much more interest than I would if I kept it at my day-to-day bank.