The Why & What

Before you can calculate your emergency fund needs, you first need to consider its purpose, and then the associated expenses.

Common Emergency Fund Purposes

When you first start emergency fund, it’s perfectly acceptable to consider it only for true, unexpected expenditures. However, as your financial health matures, so does the purpose behind your emergency fund. Now that you’re in the Independence tier of financial health, you are likely bolstering your emergency fund to a final number (future adjustments for inflation notwithstanding). Therefore, it’s worth taking a quick look back and considering how the purpose of your emergency fund may have changed over time.

Which of the following do you want your emergency fund to be able to provide for?

• Unexpected Expenses: Your fun can cover one time (or infrequent) high cost expenses like auto repairs, home repairs, medical expenses and more.
  

  When you calculate your emergency fund goal, do you want to include for some time off or a major change in your career?

• Loss of Income: Your fund can cover income lost from a job. 
• Loss of Benefits: Your fund can cover the cost of certain important benefits that may come with a job such as health insurance.
• Savings Goals: Your fund can cover all your normal expenses and your planned savings goals (both long-term and medium-term).
• Job Freedom Fund: Your fund is large enough that you’re comfortable quitting your job at a moment’s notice while you explore other opportunities for work or fun. (Some great tips here!)
• Provide Family Help: Your fund is large enough (and you’re willing) that you could help a family member or close friend that needs financial assistance.

From initially covering only unexpected expenses to eventually acting as a job freedom fund or a fund to help cover other people’s unexpected expenses, it’s not hard to see the evolution.

Calculate Emergency Fund Expenses

Prior to an emergency, it’s important to be realistic about expenses you could cut back on vs. fixed costs that you have little to no control over.

As with all budgeting calculations, you can either focus on category by category spending, or you can look at the last several months of statements from your accounts. For the second method, add up the total charges and divide that number by the number of statements you included. This is often the most accurate method for understanding your true expenses. But whether you go the account method or the category method, take a moment to consider the categories below and how “fixed” or “flexible” they may be.

• Food

• • Groceries
    

    To calculate your emergency fund it’s great to consult a list of possible expenses to make sure you haven’t forgotten anything.

  • Dining out
  • Food Delivery

• Housing

• • Rent or mortgage payments
  • Utilities including gas, electricity, internet, trash, water etc.
  • Maintenance costs

• Insurance

• • Health
  • Auto
  • Home

• Transportation

• • Gas
  • Maintenance
  • Insurance

• Other

• • Cell phone plan
  • Subscription services (television, news subscriptions, shopping etc.)
  • Childcare

• Savings & Debt

• • Contributions to long-term savings (retirement, child’s educational fund etc.)
  • Minimum payments – or more – to debt including low, medium and high-interest

Take Action

First, ask yourself, “What do I want my fund to cover?” Secondly, calculate your monthly costs, and then multiply that by the total months you want your fund to cover. And finally, write the results down in the notes section above (for logged in users).