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Is your emergency fund estimate realistic?

February 16th, 2012 at 07:46 pm

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.

11 Responses to “Is your emergency fund estimate realistic?”

  1. ThriftoRama Says:
    1329428733

    I totally agree with you. My strategy is to just save as much as possible. It isn't really based on monthly expenses. A financial planner I once spoke to said the goal should be to have six months of salary saved, but I'm not sure most people can get to that.

  2. LuckyRobin Says:
    1329430365

    I would like to eventually have at least a year's worth of income saved. I reckon on that, even without cutting back, we could live two years without a job and still do almost all of what we usually do. Three years, if we cut back immediately. It will take a lot of time to get there, though.

  3. ThriftoRama Says:
    1329430964

    Yeah. We're generally pretty good savers, but sometimes life gets in the way. We sock money away, then we have to use it, so the cushion pretty much treads water.

  4. Miz Pat Says:
    1329433075

    I'm working on increasing the fund, which I would like to be $50K. Right now its 7.7K. A bit less than what I want, but I'm striving to reach it.

  5. ceejay74 Says:
    1329434821

    Good question. If I truly had to rely on my emergency budget, meaning all of us instantly lost all sources of income and had no unemployment, no severance, no freelance work, no foodstamps, nothing -- yeah, I'd pretty much have no choice but to cut everything and stick to the emergency budget, no matter how grim it was for me and my kids. Just to make sure it lasted us the three months, y'know? (Six months eventually, ideally, but right now it would only last us three months in that scenario.)

    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.

  6. ceejay74 Says:
    1329434975

    I, too, left barber, cell phones (prepaid) and bus passes in my emergency budget, because we'd need transportation, a place for people to contact us, and a presentable appearance in order to keep looking for jobs. I cut internet access because I figure we could job search at the library or places with free Wi-Fi.

  7. My English Castle Says:
    1329436776

    I follow the same approach as Thrift-o-rama. I'd like to have a year's bare bones budget saved, but I'm probably only halfway there. But we're working on it!

  8. Tightwad Kitty Says:
    1329441242

    Emergency funds years ago in sixty and seventy were often suggested three to six months of your salary. These amounts are not possible today. You are better off if you have a mortgage to have it there and have a redraw or energency money in online bank.

    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

  9. frugaltexan75 Says:
    1329450140

    My goal is to have an EF of at least one year's salary. If I were to lose my job or move, I would have about a week to pack my things and move. Then I would have to pay rent and utilities somewhere else ... so my 1 year's salary might be enough for 6 or 7 months somewhere else.

  10. baselle Says:
    1329515104

    There is a difference between being honest with yourself, and being honest with your situation. I think that everyone should prepare for a "light emergency" and "heavy duty emergency". I think there is entirely too much let's try to pretend we still have a job spending which can run you into trouble if you misjudge how dire it is.

    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)

  11. Slacker Says:
    1329537548

    It's great if you can afford $50k in emergency savings. My family is lucky that we ALMOST(!) have that much... but I don't have it all in a savings account! We actually do some light investment with the EF. Some in stocks, mutual funds, and the S&P500. It's not the safest way, but I think the likelihood of both of us losing jobs, having an economic downturn, markets going down, and lack of family support occurring at the exact same time is rare.

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