Upping the Emergency Fund

I have historically been against having a huge emergency fund for those who are employed and living below their means. Savings accounts earn about 1% interest nowadays and I would rather have that money invested and compounding.

Personally I have kept $10,000 in a savings account as my emergency fund. This would cover at least four months of expenses for me currently. I’ve always felt comfortable with that amount for multiple reasons. First, if I were to get laid off from my job I would get paid out severance most likely, along with accrued PTO, which would total over 12 weeks of gross pay. Second, I have no debt and don’t own a home, and therefore large unplanned cash outflows are not something I worry about. Third, I’m an accountant by trade and with my certifications and experience I would expect myself to find another job in short order (I’m an optimist) that would at a minimum cover my expenses.

Lately I’ve been feeling an itch to increase my emergency fund to $20,000 up from $10,000. Below are some reasons why I think I’ve felt that way.

Investment Opportunities – All of my net worth, with the exception of my emergency fund, is tied up in low cost index funds. At some point I’d like to diversify a little bit more. I currently have zero interest in being a landlord at this point, but maybe down the road that may change. I recently came across a real estate private investment opportunity. A friend’s in-laws had been investing through the real estate development firm for years and years and only had nice things to say. After looking at the numbers, reading the investment memorandum, and analyzing the related risk, I figured it would be something I would eventually want to look into further. Unfortunately at this point the investment carries a minimum investment of around $100,000 so I don’t think I’ll be partaking anytime soon. In the meantime I’d like to have some extra cash around for various investment opportunities, if they present themselves and I do my homework and decide they would be a good fit for my portfolio.

Starting a business – I’ve always thought I’d start a business at some point. Right now the golden handcuffs keep me concentrated on my day job, but I could see pulling the plug in the next 5 years or so and trying to make it on my own. Who knows what type of business I’d start. Maybe it would just be doing what I do now as a 1099 employee or maybe it would be something completely different. Having an extra cash buffer will help smooth the transition if I ever decide to go the self-employed route.

Home purchase – I don’t think a home purchase is in the cards anytime soon. I like the freedom of renting and with my current career it just wouldn’t make sense. But I do see a home base in my future. I’m constantly on Zillow when I have down time, so I could see myself potentially going after a great deal if it was a perfect fit for me.

Car purchase – I don’t own a car and things could change in my life that would require me to purchase one. I’d much rather have the cash on hand to do so, if I decide to purchase a vehicle. Cash gives you the upper hand when negotiating a car purchase. I’ve always wanted to try out Uber, and I can’t do that unless I have a car. But it obviously wouldn’t be a reason I would buy one.

Cash is king – Cash gives people a sense of security. I don’t think I’ll ever be kicking myself for having a little too much on hand.

Luckily with my cash flow it should only take me a few months to get my emergency fund up to $20,000. I wonder if I’ll feel satisfied when it’s at that level or I’ll want to push it to $25,000 or $30,000. Personal finance is as much about emotion as it is about numbers.

How much do you have in your emergency fund? What is your reason for having that amount (i.e. strictly numbers based, emotional reasons, etc.)?

39 thoughts on “Upping the Emergency Fund

  1. The Green Swan

    I can understand the urge/emotion to wanting a bit more cash, but it doesn’t sound like there is anything urgent (i.e. < 1-2 years) that would require a higher E Fund. So perhaps parking it in a taxable brokerage account which would provide some potential growth and still relatively quick access if needed? That's what I do and I keep a "bare-bones" E Fund of ~$3K.
    The Green Swan recently posted…The Green Condor: Clearing Growth HurdlesMy Profile

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    1. Fervent Finance Post author

      From a math perspective I totally agree with a bare-bones emergency fund for my situation. But from an emotional stand point only holding onto one or two months expenses wouldn’t let me rest easy. I think my mistake is calling this an emergency fund as it’s more of an “opportunity fund.” I like having the cash on hand so that I don’t have to dip into my brokerage account if a need required. Thanks for stopping by!

      Reply
  2. Full Time Finance

    We recently upped our emergency fund as a cushion while we transition to my wife being a stay at home mom. Our emergency funds are a mix, not all being cash and honestly were in good shape financially. That being said even a billionaire or a billion dollar company could have a liquidity event and go broke. It’s best to reevaluate the amount of your fund when your risk increases.
    Full Time Finance recently posted…The Benefits of Financial IndependenceMy Profile

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  3. Mr. SSC

    Currently, we have an E-fund of about 1.5 yrs worth of bare bones expenses. This was up from our typical ~$12k we kept that would float things for maybe 6 months if we immediately cut costs to the bone.

    Normally we don’t keep that much in cash/not invested however, with the very real prospect of both of us getting laid off a while back, and the markets being “down” we upped the buffer quite a bit expecting that we’d just get forced into our Lifestyle Change on an accelerated time table. We figured it would let us prep the house for sale, find other non-oil jobs and then move and not feel so crunched or stressed. Peace of mind trumps “better returns” having that $$ elsewhere.

    We’ll back that number down to something more reasonable, especially since we didn’t have to tap into it over the 3 months of no paycheck from Mrs. SSC.

    We’ll definitely wait until after November to invest a good portion of the E-fund. At least long enough to see how the markets react to whichever candidate gets elected, God help us all…

    Until then, we’ll just leave the E-Fund where it is, even though it’s higher than we typically want. We will probably get it back to this amount before we “retire” though so if markets crash, then we can avoid selling at the basement and just tap that instead. Again, it’s all about your peace of mind and what you’re comfortable with.
    Mr. SSC recently posted…Our Money Went Where? September 2016 UpdateMy Profile

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    1. Fervent Finance Post author

      That’s quite the sizable emergency fund. But I agree with your thought process. You felt that both of your incomes were at risk and therefore hoarded cash – completely makes sense. Like I responded to The Green Swan above, I probably should think of this more as an Opportunity fund, rather than an emergency fund since I don’t foresee getting laid off or any large expenses coming down the pipeline. Either way I think I’ll be happier with a bigger cash pile

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  4. Steve @ ThinkSaveRetire

    Right now we have about $110k in living expenses saved up and stored separately, which will extend us out about 3 years – this isn’t a traditional emergency fund, though – this is money that we will plan to live on after we call it quits here in a couple of months. But at the moment, it also does give us plenty of resources to live on if an emergency does become us.

    We’re at the point now where we’ve pretty much fully funded our first three years after retirement without having to touch our investments. But, we aren’t stopping our contributions to this account, and THAT’S the money that we will use as our “next” emergency fund once we begin living off of this savings. By the time that we retire, we should have another six to eight months ready to go for emergencies, which should add up to around $25 to $30k.
    Steve @ ThinkSaveRetire recently posted…I could make lots more money if I worked much longerMy Profile

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    1. Fervent Finance Post author

      Hi Steve. A while back I listened to a podcast about at retirement age skewing your asset allocation to more fixed income / cash investments to ride out the early years of retirement. It seems you are doing something similar where you cash needs will be met for 3 years without having to tap equities. In my early planning I think I’d like to have about 2 years of cash when I call it quits, so I understand your strategy. Can’t wait until you blog about quitting for good!

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  5. Our next life

    We definitely keep more cash on hand than you do, but don’t call it all e-fund. While we’re working, we have $25k in e-fund and $20k more in “life happens.” But we’ll be increasing that to 2 years of expenses soon so we have a larger cash buffer in retirement to ride out market dips. I do think you need less cash when you’re a renter, though!

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    1. Fervent Finance Post author

      I do like your “life happens” fund and I think I incorrectly call this an emergency fund when in reality it is an opportunities fund. Need a car? Cut a check. Interesting investment opportunity arises? Cut a check. Decide to quit full-time work and enter self-employment? Have less of an issue building a cash nut then from starting for $0.

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  6. Leigh

    I think my expenses are a bit higher than yours since I own my place. I used to keep $20,000 in cash reserves/buffer (I don’t call it an emergency fund) which was about six ish months of expenses. But recently I worked to increase that up to a year’s expenses so that when the time came and I wanted to take some time off work, I could. It’s made me feel much better to have a larger buffer!
    Leigh recently posted…Married Finances: Life Insurance Isn’t Always NecessaryMy Profile

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    1. Fervent Finance Post author

      I’ve learned people don’t like calling their cash savings an emergency fund. Is it the negative connotation? From now on my cash savings will be an “Opportunity Fund.” I was interested to hear your perspective since I know you keep a decent sized cash stash. In the end I think the flexibility having the cash gives you is huge. You don’t need to tap into your brokerage account at inopportune times when you need cash. I don’t see any scenario in the future where I would need cash in an emergency, but I think it’s a great thing to have.

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      1. Leigh

        I’m at a point financially where emergencies don’t really happen – just life. Sometimes life throws a ton of expensive things at you at once and having enough cash on hand to weather that without needing to sell stocks is really useful. I had a “general sabings” account before I had even heard the term “emergency fund”. To me, “emergency fund” means you should never touch it, but I use mine to allow me to front load my 401(k), which isn’t an emergency but is a good financial decision! In reality, my entire net worth is an emergency fund where I would start with checking, then cash savings, savings bonds, taxable index funds, Roth IRA, and lastly a SEPL.
        Leigh recently posted…Married Finances: Life Insurance Isn’t Always NecessaryMy Profile

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  7. Mr. PIE

    We keep about 3% of our investment portfolio in cash. That has come down quite a bit over the last year or so as we managed our overly conservative approach. Last quarter, for example, we took advantage of a market dip and bought some international funds. At FIRE we will increase that percentage to cover 2-3 years of living expenses ( factoring in my pension as income floor and payed dividends from the taxable account of course, thus not strictly 2-3 years total).
    Mr. PIE recently posted…But What Will You Do? Part 1 – Mrs. PIEMy Profile

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  8. MDbyFIRE

    I have around 9K right now in my emergency fund (a high-yield savings account with Synchrony Bank). Originally, I picked 10K as a purely emotional number that sounded “safe.” However, I’ve since adjusted the amount to slightly less (and invested the difference) as this amount will still fund around 6 months of expenses should I lose my job. Like you, I anticipate that I’ll increase it someday, although this will not be until after I’m done with residency.
    MDbyFIRE recently posted…Brief – Presidential debate night!My Profile

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    1. Fervent Finance Post author

      I picked $10k since it sounded “safe” too. It would provide four or five months of expenses as well. I think I’ll be emotionally better off if I up it to $20k from the sheer point of being able to pay cash for a new car or other opportunities. Thanks for stopping by.

      Reply
  9. Brian @ debt discipline

    We had about $50k in our e-fund, but after a job loss and extended out of work period we are down to about 10k. I think it really depends on your personal situation. Mine with three kids, wife, mortgage is different than yours. I like the idea of having a bare bones budget too, that can kick in if an emergency pops up.
    Brian @ debt discipline recently posted…Calling Shenanigans on Cord CuttersMy Profile

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    1. Fervent Finance Post author

      I definitely agree on the bare bones budget. If I actually lost my income I could cut down my expenses even more from the level they are and stretch more time out of an emergency fund.

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  10. Gwen @ Fiery Millennials

    So far, I’ve had a “Life Fund” to help me deal with larger purchases/emergencies. It’s fluctuated between $8-12k depending on what I’ve had going on. However…. I think I might be boosting it up. My employment situation is becoming more tenuous by the day, so I can no longer depend on having an income stream. Fortunately I have very low expenses once I move from my expensive apartment (~$450/mo) so I’ll be able to survive how long it takes to get a new job.
    Gwen @ Fiery Millennials recently posted…Monthly Status Report: September 2016My Profile

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    1. Fervent Finance Post author

      I definitely agree with the strategy that for those with riskier income sources then stock pile the cash. Good luck on the job search.

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  11. Mrs. Picky Pincher

    After purchasing a house myself, I’ve really seen firsthand how important cold, hard cash is. However, it sounds like you already have yourself squared away quite nicely. It’s always great to have funds available, but maybe it would be more beneficial to save these funds once you have a more concrete goal of the direction you want to go in? For example, if your sights are REALLY set on a house, build up that fund towards that goal.

    Otherwise that money will be an extra $10k sitting in a savings account without accruing beneficial interest.

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    1. Fervent Finance Post author

      All my commenters are trying to talk me out of my “Opportunity Fund” I see. I definitely see the benefit in putting in all in my brokerage account, but at the end of the day I have a self-imposed block where mentally I CANNOT under any circumstance pull money out of my brokerage account. Maybe I need to change that mindset.

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  12. Mr Crazy Kicks

    While the optimal allocation is to have everything invested, having some cash on hand does make us feel better. We are not all investing machines, and those sound like some interesting options for the money to go to.
    I have been considering starting my own business and doing some consulting work as well. But now that I stopped working I think it might be tough to go back 🙂
    Good luck with the savings!
    Mr Crazy Kicks recently posted…Garden: September – Holy FrankensquashMy Profile

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    1. Fervent Finance Post author

      Thanks Mr. Crazy Kicks. While I know the math says invest everything and keep a small amount of cash, my mind is saying “keep more cash” just in case opportunities/problems arise.

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  13. Todd

    I think I go against the grain, but I keep my “emergency fund” in Betterment at a 60% Bond/40% stock Allocation – Here is a pretty compelling white paper on the topic – https://www.betterment.com/resources/personal-finance/safety-net-funds-why-traditional-advice-is-wrong/

    Goal was to get $18K in there – at about $19.5K now after about 10 months of market returns. Additionally, I agree with Leigh above – in a worst case scenario, the whole idea of financial independence is to remove the stress of money from your life – I feel like if there was ever some catastrophic event that called for us to tap the emergency fund, the next line of defense would simply be tapping into taxable investments.

    Seriously, read that white paper – I think you’ll change your mind about keeping the “emergency fund” in a high-yield savings account (with that being said, we do normally have anywhere between $3K-$6K in our cash accounts at a given time)

    Reply
    1. Fervent Finance Post author

      Thanks Todd, I read the whitepaper. While I understand the thinking, I agree more with Nirav from the comments of that article. When I’d actually NEED the money for an emergency is when markets could be at lows. Equities and bonds don’t have the inverse correlation most people have historically attributed to them. Maybe $20k is too high for me, and realistically $10k is smarter. But I’ll have to wait and see. Thanks for sharing.

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  14. Andrew@LivingRichCheaply

    I actually thought you’d have a lower e-fund since you live out in the Midwest. I guess here, many New Yorkers needed a bigger security blanket because of the higher expenses. I have been hoarding more cash though…not really an emergency fund, I don’t really label my money into categories. While I know I shouldn’t try to time the market, I’m a little worried since we’re at market highs…so I’ll keep a little extra in cash. Also, pretty cool that you still don’t need a car even though you’re out in the Midwest. I guess where you live is very walkable.

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    1. Fervent Finance Post author

      Yeah I could definitely get by with a $3k emergency fund but I want the cash in case my situation changes or opportunities arise. I guess it’s a mindset thing. Personal finance is more than numbers at the end of the day 😉

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  15. Matt @ The Resume Gap

    Like some of the other commenters here, I’ve never kept any account categorized as an “emergency fund,” per se. When I was working full-time, I would keep a checking balance around $30k — though that was mostly to be able to cover $10-20k of work expenses at a time between reimbursements.

    These days, I’m keeping less in cash. Taxable investments that can be sold in a matter of minutes are plenty of emergency insurance for me. They could drop in value, sure, but the math says it’s the better bet. Even when I bought my condo a few years back, I kept the purchase price invested in index funds until just a day or two before wiring the money. That’s completely counter to mainstream advice about these kinds of things … but we’re just radicals around here 😉
    Matt @ The Resume Gap recently posted…Bizarre, Chaotic, Charming AlbaniaMy Profile

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    1. Fervent Finance Post author

      I should have just said cash savings in hindsight. You’re way more of a risk taker then me apparently Matt if you leave everything invested even in ER!

      Reply
  16. Finance Solver

    I would say I have 2 months worth of emergency funds and the other majority I have in my after-tax brokerage account that can allow me to live for the next 2 years if I liquidated all of my positions and lived on that only. I’m petrified that I can be let go any time which is why I like to have that liquidity and still keep extra in my emergency fund.

    I’m sure your reasons for wanting to up your emergency fund is well documented and can’t go wrong if the reasons are good right?!
    Finance Solver recently posted…Million Dollar Club, I’m Joining!My Profile

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    1. Fervent Finance Post author

      I have money in my after-tax brokerage account as well, but I don’t like thinking that it is accessible. Mind tricks I guess 🙂

      Reply
  17. Dennis @ NestEggRx

    I think it is wise to have a bigger emergency fund especially if you have a lot of your investments in retirement accounts that you cannot touch without significant penalty for years. You state that you’ve thought about business and real estate. Why not start a real estate business? With your accounting background you are likely aware of the significant tax benefits.

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    1. Fervent Finance Post author

      I’ve thought about it in great detail. But it’s just not right for me. It would stress me out having tenants. I could hire a management company but that would eat away at a lot of the profits, so that’s why I stick to also tax efficient index funds.

      Reply
  18. Team CF

    Hey FF,
    For our personal situation, we want to maintain about €10.000 (about 3 months expenses). However, we were dicussing this yesterday and we will up this also. Primarily because we also own real estate and need a buffer in case there are issues (think broken boilers, emergency repairs, etc.). We also want to upgrade and expand our crappy kitchen (by breaking out a wall, redirecting the staircase and hallway). For this we will need about €25000. This will ultimatly make our home into another very nice and rentable unit (so that we can move elsewhere). In short, the buffer goes to €30.000-35.000 to prepare for the renos, and then back down to around €15.000-20.000.
    Team CF recently posted…September 2016 Cheesy IndexMy Profile

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    1. Fervent Finance Post author

      Good point Team CF, if you have rental real estate it definitely makes sense to have a bigger EF. Hopefully you don’t run into any big issues though!

      Reply

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