Last week we talked about saving 6 months worth of your “Must Haves” for emergencies, as recommended in All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi. In our own practice, 3 – 6 months living expenses is what we would recommend for people to set aside in case of an emergency. But how much is right for you? What factors should you consider while deciding how much to set aside?


3 Months, 6 Months, or More?

There are some important factors that should have consideration while deciding on how much is right for you.


  • Job Situation – How comfortable are you with your job situation? What about your spouse’s? If you or your spouse currently has a job which you feel is less than secure, or if you feel you or your spouse would be unable to easily find a position elsewhere should either of you lose your employment, you should probably look at saving at least 6 months living expenses for emergencies.


  • Housing – Do you own your home, rent, or live with a family member? If you own a home, you have the least amount of leeway in cutting down on your housing expenses, so saving at least 6 months living expenses would be recommended. If you are renting, you would likely have an easier time of finding a cheaper place to live if need be, but moving is also an expense that you may not want to consider. Depending on your other expenses, you could go with 3 months (if you have fewer expenses) or 6 months (if you have more expenses). However, if you live with a family member and you feel that you could rely on cheaper housing (or free depending on your situation), you may feel comfortable with 3 months for emergencies, as long as your other expenses are not too high.


  • Your level of comfort – There are people that we have come across in our business who feel completely comfortable with the idea that 3 months living expenses is enough, and if the situation called for it, they could cut back to the bone to get by. Others would feel uneasy with less than 12 months living expenses close at hand, even though we often see that as excessive. If you are going to feel stressed out about how much you have in the bank and will wonder how you would make it through if an emergency did arise, do what you have to make yourself comfortable. However, we would never recommend keeping more than 12 months in an emergency fund, and our reasoning is explained below.


Where Should You Keep Your Emergency Fund?

The point of an emergency fund is that you have easy access to it when an emergency arises. This should be a savings account or money market account (not the checking account where you keep your spending money). However, if you keep more than 3 months living expenses in an emergency fund, you may consider using a second “tier”. Keep 3 months in a highly liquid account like a savings account, and then put the rest in CDs where you are likely to find a higher interest rate. Just be sure to “tier” the CDs so that they mature at different intervals to avoid early withdrawal penalties and so you always have at least 3 months living expenses easily accessible.


And why do we recommend not keeping more than 12 months living expenses in an emergency fund? With interest rates as they are at the moment, you would be unlikely to make more than 1-2% on your money with it in the bank. Though we normally would not recommend keeping more than 6 months set aside for emergencies, we do know that there are those who need the added security. But beyond 12 months, your money would much better serve you if it was invested elsewhere where the rate of return is higher.


Do you have any additional thoughts on how much should be kept for emergencies?