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Adjusting Your Emergency Fund

3 months. 6 months. 12 months. How many months of worth of expenses do you have saved up in your emergency fund? How many should you have?

I think it’s difficult to peg down a specific number until you take full stock of your situation so any expert who claims that any time period is for you, besides that you probably want a minimum of 3 months, is just giving you an answer to be rid of you or hasn’t thought it through yet.

First, let us consider the major reasons why you would need to dip into your emergency fund:

Again, those are major reasons, there are plenty of other smaller reasons for the emergency fund but those three are the biggest and most frequent events so I’m going to focus on those. In all instances, the emergency fund is meant as a temporary funding source that should cover those events so that you can pay for those things without having to take out a loan.

Now, let’s say we start with the general advice of 6 months. How likely are you to have a medical emergency, loss of a job, or maintenance/repair expense? You’ll have to decide that on your own! If you have a family history of a medical condition and your age suggests you might be susceptible, you might want to add a few months. If you’ve noticed a recent downturn in the job market in your area, you might want to add a couple months breathing room in case you are let go. If you have an older car or an older home, you might want to add a month or two just in case you need to replace something like a water heater. Consider your particular situation and adjust as necessary.

What about some mitigating factors?

The bulk of the mitigating factors are sources of income not directly tied to your full time job. The reason they are mitigating factors is because if you do lose your job, they represent another source of income that can help cover your daily living costs. The danger is in putting too much of an emphasis on these mitigating factors, especially in the case where they’ve been fully integrated into your budget.

An example of this would be in renting out a room in your home, if the rent is 100% going towards the mortgage and you’re depending on it to make payments, then it’s not really a mitigating factor. In fact, I would call it an extenuating factor because if the renter leaves, you’re stuck paying more for the mortgage.

So, examine your own situation before blindly listening to advice of a 3, 6, 9 month emergency fund because it may be too much or too little for your situation. We currently have a three month emergency fund sitting in a high yield bank account, earning 5%, which is perfect for our needs. How about yourself? Any good (common) mitigating factors?