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Financial Rules of Thumb: Emergency Funds

Does everyone need to save three to six months' of expenses?


Over the next few weeks, I’m going to spend some time talking about all the financial rules of thumb we’ve all heard, and exploring whether or not these soundbites and platitudes apply as universally as we’ve been led to believe.

Today, let’s start with emergency funds, and the old rule that you need between three and six months’ worth of expenses set aside for the unexpected. Now, I’m all for saving for a rainy day, but the amount that’s right for you could vary based on your unique situation.

Let’s take a young and growing family where one spouse stays home and the other works a job that doesn’t bring in steady income – some months are leaner than others due to commissions or freelance income. This family probably wants to aim for six months or more of expenses put away, since there’s only one income and that income stream varies.

Now, how about a couple with no kids and two steady paychecks? This couple could be totally fine with three months’ worth put away.

As a third example, think of a retired couple who are living off of savings and 401(k) income. This family may not need a traditional emergency fund at all. The money available to them in these accounts may be sufficient to meet their needs in the event of an unexpected expense. They’ll simply need to make sure there’s enough liquidity to be comfortable. Of course, keeping a separate emergency fund anyway won’t hurt.

The amount that’s right for you and your family to sock away for a rainy day varies depending upon several factors, including lifestyle, income, monthly expenses, and other variables. Our team is happy to sit down with you and look over your individual situation, and calculate an amount that works for you. Give us a call. 

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