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Is It Time to Rethink the Emergency Fund?

For the longest time in wealth management the recommended amount of money to have in an emergency fund has been three to six months of non-discretionary expenses (mortgage, rent, utilities, groceries).

Typically, three months was the recommendation for a single individual or married couple with dual incomes. Six months was generally for married couples with one income earner.

Every so often, something comes along challenging conventional wisdom, and that can be a good thing. In this case, it’s a pandemic that’s changing how we think – about many things.

The pandemic has wreaked havoc on many lives. People have been laid off, lost jobs, are working less hours, losing income. Those with emergency funds have seen them dry up, and those that didn’t have them to begin with were worse off.

For the future, it may be wise to consider a longer (more money) emergency fund. For example, we can consider an emergency fund of nine to twelve months, perhaps longer. In fact, many retired individuals have emergency funds of twelve to twenty-four months.

Granted, retired individuals are using their emergency funds to wait out market volatility, but in a sense, working individuals are using their funds to wait out employment and income volatility.

In both situations, the longer the emergency fund the less likely individuals will have to dip into their retirement savings either when markets are down (retired individuals), when saving for retirement (working individuals), or both.

To calculate how much you need, simply look at all your non-discretionary expenses, add them together, and multiply by 9, 12, 24, etc. The reason I say non-discretionary expenses is because we can cancel TV services, subscriptions, stop dining out, etc. in an emergency.

Once you’ve got the amount you’ll need, start saving. It may take some time, but a good goal would be to save a month’s worth at a time – thus in nine months, you’d have a 9-month emergency fund and so on.

Finally, put your emergency funds in a safe place such as an FDIC insured savings account. Don’t keep them in a safe at home (most insurance companies will not reimburse you if it lost, stolen, or destroyed), and don’t put it in risky assets such as stocks, bonds, real estate, etc.

You want easy access to this money, without worrying that when an emergency arrives, your funds have dropped from volatility.


  1. Dave says:

    I’ve always felt most comfortable keeping emergency savings far beyond the typical guidelines, probably as a result of starting my career at the beginning of a recession and witnessing subsequent layoffs of coworkers and people struggling for 6+ months to find new jobs. However, I have to respectfully disagree with not investing this, or at least some substantial chunk of it.

    Let’s say someone has $50k in their extended emergency fund. Just a 2-4% extra return on that money gets $5-$10k over 5 years and $10-20k over 10 years without even considering compounding. Historically, that’s not a difficult return to achieve with a bond heavy allocation with a rare max draw down of 5-10% (which can easily be buffered against by just keeping an extra month of savings, eventually paid for with the investment earnings). In the meantime, anything FDIC insured likely means you aren’t even keeping up with inflation.

    I view emergency savings for an extended time frame to be in a different class than the 3-6 month time frame. Yes, keep those primary emergency funds in something safe and easy to access, but anything significant beyond that you are probably going to be better off in the long run getting a decent return on the money and at no significant added risk.

    1. jblankenship says:

      Your point is valid, however, the reason that we have a specific emergency fund is to have ready access to cash in any circumstances. If you’re comfortable with having this money at risk, then go for it. My recommendation is to have your “sleep well at night” money somewhere super-safe, not exposed to market fluctuations.

      1. Dave says:

        I honestly sleep better at night knowing this money is working for me rather than just sitting idle. From a risk standpoint, you also have to consider the risk to future financial security incurred by losing out on the growth of this money. There is only so much income to spread around and putting these funds in relatively low risk investments allows me to straddle the fence between having extended “emergency” funds while also making my financial future better by earning a decent return. Going 100% in either direction with this money would actually feel riskier to me, but we all have individual perspectives on such things.

  2. Steve (NWOutlier) says:

    Hi! Just to add a thought; if you started your emergency fund say 7 years ago and placed it into a taxable brokerage account instead – even a 50% market correction would not have touched your principle… my emergency fund has grown to 2.6x the amount I owe on my house.. even with the March 2020 decline – any emergency that comes up I would still not be selling at a loss. Now – assuming the emergency comes sooner? then maybe having it in cash has advantages.. but once you pass a certain amount of gains – the erosion on your account in a correction will not affect you. Keep a balance… make it work for you.

    thank you for your blog! I love other peoples ideas to balance with my own.

    Best Regards,

    Steve (NWOutlier)

    1. jblankenship says:

      If only we could plan the emergency to occur after we’ve accumulated 7 years’ worth of market returns…? That would certainly be ideal.

      I agree with your assessment, after a certain point, it might make sense to put a portion of your emergency funds in something other than a pure cash instrument (like a savings account or money market). However, the whole point of an emergency fund is to have this money available regardless of market activities, so safety is always a huge concern.

  3. Lisa says:

    A year or two of salary in a stagnant savings account earning nothing? No thanks.

  4. Eric says:

    One key thing missing in calculating how much you need is to explore those costs will go up with job loss.

    Mainly, health insurance. If I lose my job, I would need to go on COBRA, that would increase healthcare costs by nearly $1k per month!

  5. clydewolf says:

    Good advice and suggestions for generating that Emergency Fund!

    But here we are 6 months into the pandemic, and without a job or reduced income, any EF we had is probably depleted or well dinged. And there appears no end in sight. The suggestions are good for rebuilding the EF when we come out the other side. I hope that is soon.

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