I think that there is a notion that in an emergency we will immediately cut all unessential expenses -- after all, it is an extreme situation. Most people calculate the emergency fund based on that premise.
But in reality, how many people cancel their cable the day they loose the job? I would say hardly any. You'd be stressed, and cutting things you are so used to will be difficult.
Or assuming that you'll have $0 eating out costs.
If you lost your job, it is one thing, you can stay home and cook the meals for your family.
But if your emergency is a family illness -- you have different challenges and different expenses.
I've been through that -- when you have a relative that is very ill you need to take them to the hospital (gas, time, parking -- parking can really add up), food while there, or eating out after you leave at night exhausted. You can't assume that you won't have ANY eating out costs or miscellaneous costs.
If you are job hunting you'll still need an occasional haircut. When you go for an interview you might need a manicure and a dry-cleaned suit...
Or $0 for vacation. True, it is not the time for vacation, but would you feel guilty if your family can't go anywhere in the summer?
Will you still give money for your child to attend a birthday party or a museum/park/movie with their friends? Not even once a month, the entire summer? Lets be honest, very few people could do that.
Or extra money for gas to go if you are invited to a friends weekend house few hours away? It would be an extremely cheap "vacation" but it does cost something, and it would suck to be forced to pass up on such opportunities at a stessful time for your family.
So what is the solution? To be honest with yourself and include these numbers in the calculations of what you need to live the way you will actually live if an emergency happened.
So I do include these unnecessary expenses in our calculations for "emergency" months, just in case:
$115 cable (because I know we will be resistant to cut it)
$60 street parking in the city
$60 grooming
$120 entertainment common
$120 entertainment personal for DH and me
100 baby's ESA (this is a very limited time opportunity)
$100 eating out
$300 unpredictible (copays, fuel assessment, any small things that pop up. Because things do pop up!)
I budget for these things to be in our emergency fund monthly budget, because I know we are likely to spend it even if someone was unemployed, and that a bare-bones estimate is not realistic.
Is your emergency fund estimate realistic?
February 16th, 2012 at 07:46 pm
February 16th, 2012 at 09:45 pm 1329428733
February 16th, 2012 at 10:12 pm 1329430365
February 16th, 2012 at 10:22 pm 1329430964
February 16th, 2012 at 10:57 pm 1329433075
February 16th, 2012 at 11:27 pm 1329434821
BUT, if (as is the more likely scenario) we had unemployment compensation, or one of us still had income, or we were able to pick up odd jobs, I would definitely try to leave room for some treats in the budget. Because then we wouldn't have to depend enTIRELY on our emergency fund to keep going.
February 16th, 2012 at 11:29 pm 1329434975
February 16th, 2012 at 11:59 pm 1329436776
February 17th, 2012 at 01:14 am 1329441242
Today everything today is bought on credit in most households. So you need to have amount put aside to cover your credit minimum payments for at least for three months plus living emergency fund so that you live today to today or make you money go further with out to much stress.
I have floats amounts for most categories in my budget that I can increase or borrow from if there is an emergency. Being on age pension, I have a fixed income so I need to emergency funds over and above my annual bills and daily living expenses. These strategies I have found allow me to be stress free.
Kitty
February 17th, 2012 at 03:42 am 1329450140
February 17th, 2012 at 09:45 pm 1329515104
I have a big emergency fund but I've still run what-ifs as tight as they will go. Its a good exercise to have several depths of emergency, including absolute bare bones for near economic collapse, which is what I experienced when I was on UE in the mid-90s. (Arizona UE is pretty brutal)
February 17th, 2012 at 10:27 pm 1329517637
Those households have a bigger problem, and 3 month of minimum payments won't fix it. If someone is carrying credit card debt, it means they are living beyond their means BEFORE the emergency or a job loss even happened.
"Emergency funds years ago in sixty and seventy were often suggested three to six months of your salary. These amounts are not possible today."
Why are they impossible? They are more necessary than ever - jobs used to be more secure and medical care cheaper. Sure, you can't save for 6 months of emergency fund in 6 months, but you definitely can do it if you are steadily saving over a couple of years.
February 18th, 2012 at 03:59 am 1329537548