An emergency fund and its size is a personal thing. I have the luxury to define the size of my emergency fund and I am grateful for that. Last week, I made an adjustment. See how I define my emergency fund size.
While reading the blog of Geldnerd on rounded numbers, I realised I had a rounded number in my emergency fund. As such this is not a problem. It just made me thinking on what my emergency fund should be in size.
My emergency fund has as main purpose to not touch my investments in the case of a major life event with a big financial impact. There are people out there that have a different view and consider the ideal size close to 0. I am not ready for that yet!
The math is easy Emergency fund size = X months times income or expenses. That is basic simple math.
See the challenges here? There are a few decisions to make. And there is no magic formula!!
- X months: what drives this X? Your personal situation. There are some consideration to increase or decrease the number of months
- What if you loose your income? Is there one or more than one income. I am a single family (not yet living together with my girlfriend) so one income. For me, this increases the X
- Do you have kids? I have 2 and would not want them to have too much impact would something happen. This increases X
- Is there still a mortgage or not and how big is it? Neutral in my case
- Do you have credit lines available? I discard this as in Belgium, there are few possibilities to pay electricity or medical bills on a credit card (would you know some, let me know) and extra mortgages are not so common for personal expenses. So, in my case this is neutral on X
- What insurance do you have that could coverage some expenses? I have an income protection in case of sickness. So, that lowers my need as the insurance would pay in case of longterm sickness. And accidents to the house due to storm fire,… are insured as well. This decreases X
- What is the general state of the house, the appliances and the capacity to pay small to medium repairs with monthly income? In my case, this reduces X.
- Is there a passive income stream? In my case, this is neutral on X
All in all, I settle on X=12. That is one full year
- Income or expenses? The difference can be big.
I decided to go for regular expenses, so excluding holidays. That is a big difference.
As you can see, there is no magical scientific formula to define your emergency fund. It is after all personal.
With this information, I decide to reduce my emergency fund from a well rounded number to 12 times my monthly expenses.
What drives your number of months? Do you have other parameters?
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