It’s time to talk about How Much of an Emergency Fund Do You Need?
But first, let’s talk about your debt for a minute. Thinking through your debt, how much of your debt was intentional and deliberate?
Intentional or Accidental Debt?
For many, only a portion of their debt was intentional and deliberate. The rest of the debt “just happened.” And “just happened” means that debt was used to pay for something that you didn’t expect to happen, intend to happen or just intended to pay for it and just couldn’t.
Generally, this is in the case of emergencies like medical emergencies, home repair emergencies, car repair emergencies, pet emergencies, etc. The truth of the matter is that you can’t avoid all emergencies. If you are living, an emergency is inevitable at some point. You just can’t simply plan to not plan. Not planning can wreak mayhem and chaos in your finances.
And this is true, whether you are debt free or not. If you are working on paying off your debts, then it is even that much more important. One way to get out of debt fast is by not accumulating more. Many have to go into debt for emergencies. You don’t intend to, but the money is just simply not there to cover the debts.
That’s why you have to have a “bare minimum” emergency fund. If you are debt free, you really need a nice savings nest egg beyond what we are suggesting here as some emergencies are not minor and you want to be prepared. But in this post, we are talking about the absolute bare minimum emergency fund that EVERYONE should have.
Yes, that emergency fund is critical to your success. Life is not on hold. Appliances break, accidents happen, your home ages and breaks down and people get sick and injured. It’s just life. But they are a part of life that can seriously hurt you financially if you are not prepared.
You need something to cover most emergencies and you need something NOW, while trying to keep you on track for your debt payoff goals.
How Much of an Emergency Fund Do You Need?
When it comes to emergency funds, there isn’t a “one size fits all” type of amount. In fact, your emergencies are often relative to your lifestyle and your lifestyle is defined by your income and limitations.
Thus, an easier goal for everyone to have an emergency fund is percentage based.
We would recommend that everyone has an emergency fund that is equal to 1-2% of their gross annual income.
We have found 1% to be a bare-bones baseline and will be enough to cover emergencies in most circumstances. However, for some families, a boost up to 2% of the annual household gross income may be necessary.
Because the emergency fund is percentage based, we have found that this is much easier for many to reach this goal and reach it quicker. For example, if you make $30,000 a year, an emergency fund calculated by this 1-2% rule is $300-$600 for your goal. If you make $100,000 a year, $1,000-$2,000 is your goal, etc.
So should you choose 1 or 2%?
That’s a great question and we have defined some situations in which a 2% emergency fund may be necessary. With that, we encourage you to use this tool and answer the questions to determine your emergency fund goal.
- Do you have any major appliances greater than 10 years old? (Stove, water heater, fridge, etc.?)
- Do you have a vehicle with more than 100,000 miles?
- Do you have more than four people in your household?
- Do you have a home insurance deductible greater than or equal to $1000?
- Is your home over 20 years old?
- Over the past year have you had more than one emergency expense?
- Do you have aging pets?
If you answered “yes” to two or more of these questions, we would recommend an emergency fund of 2% of your annual income.
Figure the Dollar Amount
The next step is figuring out exactly how much you need. If you need 1%, simply take your total gross annual income and multiply by .01. This will give you the dollar amount you need to save. If you need 2%, simply take your total gross annual income and multiply by .02 to figure the dollar amount you need to save.
Set-up a Separate Account
Now that you know the amount, it’s time to start saving for it before you proceed with more debt payoff or other financial or savings goals. In the case of an emergency fund, we would highly encourage you to set up an entirely different savings account, completely separate from your normal checking or savings accounts. You do not want this money to get mixed up with other savings funds or other accounts and accidentally get spent. In addition, by setting up a separate savings account for this purpose, you create an additional level of security from you. Meaning, if it is harder to access on a daily basis, you will be even less likely to accidentally spend it on non-emergencies like that weekend trip or a “deserved night on the town.”
Now it is time to fund that emergency fund…QUICKLY!
This is one of the few times that we would suggest making major sacrifices for a very temporary set of time to meet this goal. With the tips we share on our site and in our other eBook titled: “How To Find $1,000 in 30 days,” most of you can fund a 1-2% based emergency fund in 30 days or less. If it takes longer, that is completely fine because you are still making progress. Don’t forget this!
Fill it up again!
If at any point in the process you actually need your emergency fund for a real emergency, once the emergency has passed, plan to refill your emergency fund so that you can be prepared for the next emergency if one were to come along.
Are you looking for more?
This is simply a quick tip that is covered more in depth in our new book The 2% Rule to Get Debt Free Fast: An Innovative Method To Pay Your Loans Off For Good. This book includes all the details of not only how we paid off our debt with this innovative strategy (we paid off over $90K in just three years once we developed this strategy) but includes all our pain and struggles, the lessons we learned through the process, and is a simple step-by-step guide on how you can use our strategies to pay off your debt – once for all! Plus, if you preorder the book now you can get our FREE 50+ page workbook (see all the details here) with all the worksheets we developed to assist you in the process.