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How Big Should Your Emergency Fund Be?

Before I started budgeting, I remember feeling helpless when an unexpected expense popped up. I’d stare at my quadruple-sized phone bill, the veterinary bill or the car repair bill and think, “What am I going to do?!” Then I’d scramble to figure it out, which usually left me struggling for weeks as my income gradually caught up with my spending, again. Of course, Rule Two fixed the problem, mostly, by reframing “unexpected expenses” as true expenses. And that’s what they are—the truth is, life costs money and you can’t expect it to require that money in even, regular intervals. This realization is why we all know that saving money in case of emergencies is a very good idea. A more challenging question is how much should we save? There’s no one-size-fits-all answer, but here are a few things that can help you figure it out:

1. What’s Your Experience Level?

Due to lack of experience, new budgeters tend to keep things basic. They start out with categories for their regularly recurring bills and expenses, like like rent/mortgage, utilities, phone, groceries and gas. But it’s a little harder to create a list of categories for less regular expenses, such as:

  • Infrequent, Fixed Expenses (e.g., annual insurance premiums, cloud storage or annual membership dues)
  • Infrequent, Variable Expenses (e.g., Christmas spending, quarterly fuel bills or textbooks)
  • Unexpected Expenses (e.g., Emergency veterinary bills, car repairs or a locksmith)

… or, in other words, true expenses! As time goes on, though, we naturally stumble across these more irregular obligations, adding them to our budgets as we go. The result is fewer “emergencies” (and less need for emergency funds!).

2. How Steady Is Your Cash Flow?

Do you know the date and exact amount of your next paycheck, and are you relatively secure in your job? Or do you get paid based on commission or by the gig? If your income is variable, less frequent and/or not reliable, the more you should pad your savings.

3. What’s Your Price for Peace of Mind?

Only you are the expert on your life. Taking into account your cost of living, income, job stability, health and your tolerance for risk, how much money do you need in the bank in order to sleep well at night? You don’t have to stress about getting things perfect, either. The most important thing is that you’re aware and saving! So, pick a sensible number, set a goal and get started. You can always revise your targeted amount as you go.

Find yourself wondering "Where did my money go?" all too often? Check out our comprehensive guide on this common problem.

A Final Word On Saving ...

To incentivize saving (and to resist dipping into emergency funds for non-emergencies), get specific with your categories. For example, rather than simply creating a generic ‘Emergency Fund’, set up categories for job loss, air-conditioning replacement, a new washer/dryer, emergency medical care, maternity costs, and so on. And, if you like, supplement your specific savings categories with a catchall emergency fund for the oddball things that you could, truly, never see coming—a little extra padding never hurts, right? For more information, or if you have any questions, drop into one of our free, online workshops. Our teachers would be thrilled to help.

Want to start spending and saving in a way that will change your relationship with money…and your life? Try YNAB for free for 34 days—no commitment or credit card required.

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How Big Should Your Emergency Fund Be?