How Big Is Too Big When It Comes To Your Emergency Fund?

It’s one of the basics of personal finance: building up your emergency fund. But just because this is one of the first steps people take on the road to financial independence doesn’t mean it’s a simple one. Ask five personal finance bloggers how much money they think you should have in your emergency fund, and you’ll likely get five different answers. Even the “pros” differ on what’s the right amount: Suze Orman looks for eight months of emergency savings, while Dave Ramsey urges his fans to save for between three and six months of expenses.

Which is the right answer? Is there a right answer?

A Brief History of My Emergency Fund

For years, my husband and I have maintained a pretty sizable emergency fund. This habit started within the first few days of our marriage, when we decided to put every penny of the $5,600 we’d received in checks and cash at our wedding into our savings account instead of spending it. For most of our marriage, we’ve had at least this much cash on hand; at many times, we’ve had far more than this amount.

However, we’ve never had an emergency that required us to drain the liquid assets in this account. In fact, when this account starts to balloon – and I start to worry that all this cash is going to waste and may be put to better use elsewhere – we’ve pulled a portion of the money out to pay down installment loans like our vehicle loans or my student loans.

Our Emergency Fund Right Now

Today, our emergency fund holds roughly seven months’ worth of expenses – and that’s if we didn’t make any cuts or rearrange our budgeting in the face of a true emergency. If we scaled back our monthly spending by 15%, a number which, at our current spending rate, is totally doable, we’d have eight months’ in our emergency fund; scaling back even further – say, knocking 25% off our current monthly expenses (doable, but more challenging) – would give us nine months in the bank.

My husband and I have largely built our emergency fund on the premise that the so-called “emergency” would be job loss; however, when I first quit my full-time job to work freelance more than two years ago, I lived on basically one salary (his) for several months without having to dip into our savings whatsoever. On top of that, my husband’s job is very secure; as a law enforcement officer with more than seven years experience, the only thing that would jeopardize his employment status is a black mark on his own criminal record which, if you know my husband, is beyond unlikely.

That leaves a true emergency – perhaps a car accident, a medical condition, or a calamity at our house – as the only real way we’d be forced to drain a sizable portion of our emergency fund. And since we carry insurance for all of these things, we’d only have to pay the annual deductible, which are:

• $3,500 annual out-of-pocket max on our health insurance family plan
• $1,000 deductible on each vehicle (we have two cars, both of which we own outright)
• $2,500 deductible on our home (we opted for the higher deductible in exchange for a really low annual premium)

At this rate, we could pay the OOP max on our health insurance, and still have enough to pay the deductible on our cars more than a dozen times over before we ran out of cash. Say what you will, but I think it’s highly unlikely we’re going to have double-digit car accidents in a short period of time, or half a dozen house fires, floods, or break-ins all at once.

So What’s My Emergency Fund Doing For Me?

My husband started advocating recently for a pared down emergency fund. At first, I balked. I like having liquid assets on hand in case of emergency. But when he pointed out that we’d never encountered an emergency, I too stated to wonder exactly how my emergency fund was working for me. So I started to do some math:

I felt like I should have enough cash on hand to cover the triple-threat of having to pay down all my major insurance deductibles at once. That was $7,000, which represented less than half the money we have in our emergency fund right now. Then, I decided to give myself a $3,000 cushion for “emergencies” our insurance policies wouldn’t cover – things like a new engine for my car or a new furnace for our house. At that point, I settled on $10,000 as a solid number for my family’s emergency fund.

That leaves us with several thousand dollars available to do whatever we want with. Most likely, I will transfer it into the account we’ve established for building up our resources for a down payment on our next house; I’m also considering putting a large portion of it into my Roth IRA for the 2013 fiscal year, fully funding the account in one lump sum instead of in monthly installments.

Reader, how much is the right amount for your emergency fund? 3 months? 6 months? 8 months? More? Why do you feel that way?