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Emergency Fund

Everyone should have an emergency fund. But how much should you have? $100? $500? $1,000? $2,000? How much do I need?

It depends. It depends on what stage of life you are currently living. Are you drowning in debt or are you debt free? Do you have kids at home? Do you have a job with variable income? All of these questions and more need to be taken into account as you figure out the right amount.

If you have debt other than your house, then your emergency fund should only be $1,000, generally. The reason for this is that you need every dime you can get your hands on to pay off your debt early.

Once you are debt free (except the house) you can no grow you emergency fund into three to six months worth of living expenses. If you have a stable income and job, then maybe you only need three months in the emergency fund. If you have a job or income that varies, like a commission based job, then you will probably want six months of expenses in the emergency fund. If you have circumstances that require more free cashflow, like an illness or bad luck, you may want to put more in the fund.

Now when we talk about 'monthly expenses' we mean actual-real-life budgeted expenses, not a beans and rice budgeted expenses. If you ever have to use the this emergency fund you want to make sure that you have enough in the fund to make it through the emergency.

Bottom Line: The more stable your financial situation the less you need in the emergency fund. The less stable your financial situation the more you need in the emergency fund.