How do you calculate number of months in your EF?

[disneysteve]

I think of our emergency fund as treading water financially until things get back on track. That means all of the bills are paid with minimal disruption of our normal life. Obviously we wouldn't go out to eat, but I'm not sure we'd be cancelling Netflix on the first day either.

I tend to agree, but I also know that this is often a mistake that buries people. They wait too long before cutting back and going into survival mode. That's happened to many people in the past year or two. They lost a job and figured they'd find something quickly so they didn't make any major cutbacks. Next thing they knew, it had been 6 months or 9 months and still no job prospects but they had burned through their savings maintaining the same lifestyle. Had they slashed spending from day one, their savings would have lasted for many more months. Sometimes they do it to "protect" the children and try and go on as if nothing has changed. The reality is that the kids know what's up and would rather give up premium cable and trips to McDonald's than have parents who are stressed and fighting about money all the time.

[fruitbowlk]

You can always use a Emergency Fund worksheet to figure how much you will need.

Ex: http://www.smartaboutmoney.org/Porta...rgencyfund.pdf

[Caoineag]

My first EF goal will be 6 months' worth of expenses plus some discretionary if both of us lost our income (not as much as normal, but enough to maintain sanity). A bigger concern for me though is the amount of savings I need for the periodic big picture items (new roof, new car, etc). These items tend to be larger one time events that if left unplanned can spring up at the worst possible time. So my current EF is the money I am saving for things I know will need replacement in the future.

I do have exact numbers because I have a written budget.

[ceejay74]

Thanks guys! Now I have more of an idea of the range of meanings it can have when someone recommends a 3-month EF or 6-month EF.

For myself, because I do spreadsheets for fun, I made out a budget where I cut all discretionary/spending money, any student loans that we could get hardship deferment for, and all savings. I cut the grocery/household line item way down. Cut Internet (we could go to the library) but kept cell phones (we have no land line). But then I added in $400 per month per person for health insurance and $85 per month per person for bus pass (our only mode of transportation).

It came to $4900/month. (That will go down to $4300/month in December when I pay off a debt with a large minimum payment!) Realistically we would stretch the money much farther because we'd have assistance like unemployment (and hopefully could find cheaper health coverage), but this is how much we'd want per month if we had no assistance.

Based on that number I have less than a month and a half in emergency funds. (But once I pay off that debt, just over a month and a half! What a difference getting rid of debt makes!)

[bjl584]

I use monthly gross income as my guide. I am working on building a 6 month gross income EF. It's a lot easier than trying to figure out all of the details of monthly expenditures.

[disneysteve]

I use monthly gross income as my guide. I am working on building a 6 month gross income EF. It's a lot easier than trying to figure out all of the details of monthly expenditures.

You can't go wrong that way. If you save 6 months of income, you will be sure of having at least 6 months of expenses and most likely more.

[bjl584]

You can't go wrong that way. If you save 6 months of income, you will be sure of having at least 6 months of expenses and most likely more.

That was my thought process as well. 6 months of income should allow me to survive for around 10 months give or take. I originally tried to figure out my budget and expenses, but it became too complicated. The entire scenario changed once I hypothesised that I was no longer employed. (No more 401K contribution, less gas and wear and tear on my vehicle, more in heating and electric bills since I would e home more, and the list went on and on.) That's why I decided on gross income as a guide.

[Daylily]

But then I added in $400 per month per person for health insurance and ...

I think sometimes people forget about the impact of health insurance when going from employment to unemployment.

When I was working I paid roughly $200 a month in premiums, but when I went on Cobra that went up to $800 a month. That difference for those of us who use a plan offered by an employer is definitely worth factoring into the Emergency Fund.

[Daylily]

I just did a rough calculation of all my bills and such and what it would take if I ever had to pay Cobra again and how much food and fuel I would need at a minimum to get by for a month. My EF is funded at just over 12 months. If I ran out of that, the money in my vacation fund and the money set aside each month in another account to pay quarterly taxes could be consumed and that could provide another month of two. I really don't ever think in terms of 3 months or 6 months or 12 months, I just know that I'm comfortable with what's in there and that I don't contribute to that account anymore. Plus, the 'number of months' varies depending on obligations/debt that I have taken on. For example, I am currently in a two-year loan on my car. That will be paid off in eight months which will in turn make a difference in how many months my EF will cover. But I really don't think in terms of how many months I have. I guess the only time I do ever think about it is when I take on new debt. I always consider the impact a new payment would have if we were to lose both jobs.

By the way, in my household we have both gone through periods of unemployment; once for 7 months, once for 6 months, once for 1 month between the two of us.

[wincrasher]

If you are healthy with no previous conditions, I'd drop the Cobra and get private insurance. Can be alot cheaper.

But if you are otherwise, then you should buget for the Cobra - your HR dept may be able to give you a clue what it would run.

I generally don't budget, but if unemployed you need an "austerity budget" for the bare bones minimum you need to get by. Then multiply that number by 6 to 8 and there you'd have your EF.

Just taking your gross is probably not what you'd need. But if saving that much is not a problem for you, then by all means do it. The more the better - some job categories should have a 12 month EF probably.

[disneysteve]

If you are healthy with no previous conditions, I'd drop the Cobra and get private insurance. Can be alot cheaper.

Unless you live in New Jersey

or a couple of other horrendous insurance states.

[TBH]

I feel most comfortable having 6 months' worth of normal spending saved up. I assume it could last 9 months or so if we were really living off of it with no other income, because we'd cut out extras like eating out and buying out-of-season fruit.

But I use the same account for emergency savings and for big irregular expenses, like annual insurance premiums and car repairs. So I'm adding to it all the time, and sometimes we're a bit under or over that 6-month mark.

Also, because we have multiple income streams, it's pretty unlikely that we'd be down to ZERO income. (knock wood) It's much more likely that we'd lose a major source of income, like 30-40 percent of our household gross, and then we'd cut back our spending, work on replacing it as soon as possible, and also draw a bit out of our savings to cover the shortfall until we got back on track.

[disneysteve]

because we have multiple income streams, it's pretty unlikely that we'd be down to ZERO income.

That's my theory, too.

If DW loses her job, it would have a minimal impact on our spending since she only works PT and it wouldn't be tough for her to find something else if needed.

If I lose my job, there are numerous companies that do nothing but place physicians in short term positions. I'm pretty confident that I could be working within a couple of weeks though I might need to temporarily relocate and be away from my family in the process. I'm licensed in 2 states so I'd be willing to go anywhere in those states if necessary. I could also continue to do all the online surveys I do (even more since I might have more free time). I made over $1,000 last month just from surveys.

If I got sick or injured, I have a very good disability income policy that would kick in.

The last time I was out of work, I started selling on ebay full time and was bringing in up to $3,000/month from that (and that was almost 10 years ago).

[lucmas]

Personally, I wouldn't include the savings portion because in an emergency situation, I wouldn't expect to be adding to savings. I also wouldn't include any extra that is currently being paid to debts. When I was out of work, I stopped all the auto-investing plans and stopped the extra student loan payments.