Managing your money is a constant push and pull between watchfulness and restraint. A good investor, for example, keeps a close eye on their investments without overreacting to short-term volatility. You need to be aware, but also patient.
But most people don’t think of their emergency funds that way. They assume that after hitting the mark they’ve set for themselves, it’s perfectly fine to let that money sit around gathering dust until an emergency presents itself.
That’s a great way to find yourself struggling to make ends meet when the time comes. The emergency fund you put together in your early 20s is probably inadequate by the time you hit 30, and even more so by 40. To avoid this, you need to be checking in regularly.
Here’s how to reevaluate your emergency fund, and what to do if it’s no longer sufficient.
Check Your Expenses
An emergency fund should cover anywhere from three months to a year’s worth of expenses. If it’s been a while since you put together your emergency fund, it’s time need to examine your budget and see what new expenses have cropped up. Inflation can also cause your emergency fund to lose value as the years go on, so a small boost every few years is usually a good idea.
Make a list of all the recurring expenses you have every month, both variable and fixed. Write down the most you spend in a given month per category. If you have a $300 electric bill in the summer and $100 during the winter, you don’t want to use $100 as your baseline when there’s a chance you might need the emergency fund at the beginning of summer.
Exclude any discretionary spending you could easily curb if an emergency happened, but don’t take it too far. You shouldn’t have to live like a monk just because your emergency fund was too small. Remember, it’s better to be overprepared than overwhelmed.
Once you have the total amount of monthly costs, divide it by your current emergency fund to see how many months’ worth of expenses you really have. If you have less than three months, create a plan to start saving until you get there. If you have between three and six months’ worth, keep reading to see if you need the full six-month emergency fund.
Evaluate Your Circumstances
It’s not uncommon for your emergency fund needs to evolve as your life circumstances change. If you’re single and living with your parents when you first put together an emergency fund, your expenses and volatility will be low. You might only need two or three months’ worth of spending.
But after a few years, your situation will probably be different. Maybe you have kids and a stay-at-home spouse. Maybe you own a home and help support an elderly family member. Your needs have drastically changed, and your emergency fund needs to change too.
Common advice tends to skew between $1,000 and three months’ worth of expenses in an emergency fund, but many people need closer to six months’ worth.
Anyone in the following circumstances needs to have between three to six months’ worth of expenses saved:
- Those with children, especially single or stay-at-home parents
- Homeowners with a mortgage
- Self-employed business owners
- Those who take care of a dependent relative
- Seasonal employees or those who work on commission
I recently had a financial planner advise me to increase my emergency fund from three months’ worth of expenses to six. My husband and I are both self-employed and work in the same industry. If something were to happen, he argued, we would both be affected.
I’m embarrassed to say I hadn’t considered this possibility on my own. Of course, I’m aware that freelance writing is a volatile industry, but I still didn’t consider saving more to better prepare myself. So I swallowed my pride, took his advice and am now saving for six months’ worth of expenses.
I like to think of myself as a financial expert, but this was a sobering reminder that everyone needs a wake-up call every now and then. I realize that I need to evaluate my emergency fund on an annual basis. It’s better to find out now that my savings are inadequate, rather than during a crisis.
When something changes in your life, like a move to a new state or the arrival of your second child, reassess your emergency fund and make sure it’s aligned with your current budget. You might be surprised by what you find.
How to Boost Your Emergency Fund
If you’ve discovered your emergency fund is woefully inadequate, you have two options: spend less for a few months to make up the difference, or find a way to make more money.
The first strategy could mean giving up restaurants, skipping the family vacation or finding frugal entertainment options. Even small expense cuts can have a significant impact over the course of several months.
If you’d prefer to earn more money, here are some ideas on how to beef up your emergency fund as quickly as possible:
- Ask for overtime, a raise or a promotion at work
- Sell unwanted items sitting in your garage or basement
- Join the gig economy and work for Uber, Lyft or Postmates
- Cut out most of your discretionary spending for a few months
- Stop making bonus debt payments (keep paying the minimum)
- Apply any windfalls toward your emergency fund, such as tax refunds or rebates
The only thing you shouldn’t do while rebuilding your emergency fund is halt retirement, HSA, 529 and other important contributions – unless you can’t think of anywhere else to cut. It’s better to rebuild your emergency fund slowly than to put your IRA on hold.
You should also avoid selling off investments to add to your emergency fund. Retirement contributions should never be touched unless the bank is about to foreclose on your house or your child needs surgery. Doing so will just set you up for a bigger emergency down the road.