In my 2017 Goals post I mentioned that my ultimate goal for my emergency fund was to save 1 year of living expenses.
You may wonder why I want so much in savings. I’m single. I don’t have any dependents, and I live rather frugally. Simply put, I want more because what I have saved so far doesn’t align with my goals.
My current 2.5k mini-emergency fund is a needed life line, a life preserver, should something unexpected, yet minor happen in my life. The life preserver doesn’t look pretty, nor does anyone using it; but that’s not the point. The life preserver has only one job, to keep your head above water until you’re out of danger. It does not provide comfort or space/buffer from the danger.
This level is savings is fine for some, particularly those who have a relatively low amount of debt compared to their income and who will be out of debt in a relatively short amount of time (less than one year). This is where my savings are now, and I’m seeing that this is not enough.
In the near future, within the next couple of years, I’d like to build up a larger $8,000 safety net. This is where I should be. A good safety net would provide me with more of a financial cushion. It’s a more elevated, softer place to land that would provide more of a buffer between me and the dangerous abyss of destitution below it. heh.
This middle tier of emergency fund (~ 3 months of expenses or so, depending on personal circumstances) is for those who have high amounts of debt relative to income that will take years to pay off. $8,000 is way more than 3 months of current expenses for me, but there will likely be other circumstances involved which would cause me to use my emergency fund.
If I have to move suddenly because Landlord finally flips all the way out or something else happens, my rent will go up, way up. I’d have to pay first months rent, last months rent and security deposit plus moving expenses. $8k would far more than cover this scenario.
If I fall ill and reach my out of pocket max on my health insurance. $8k should cover this and most additional smaller non-covered medical expenses.
A worse case scenario, albeit rather unlikely, is that I lose my job AND have to move at the same time, or some other combination of job loss, illness, or forced housing relocation. The cost of this kind of scenario would run over $8k, but that is what the fully funded emergency fund will be for. Once I am out of debt, I will increase my savings. In the meantime, the $8k safety net is my new emergency savings goal.
I will take a look at my options for that soon. I should know what my salary increase will be in a couple of weeks, so at that time I can start playing around with a spending/savings plan. I’d hate to have to sacrifice contributing to my Roth IRA or something else, but… Ugh! I hate being in debt and always having to make such choices! 😡
But ultimately, for me, even $8k is not enough. I’ve realized that I want a full 1 year savings cache because, in the future, if the proverbial rug is pulled out from under me and I lose my job again, I don’t want to land on a life preserver or even a safety net. I want to land on a hammock.
If I suddenly find myself unemployed for any reason, I want to have enough cash in liquid savings, that I can take a solid 3 months to travel abroad (frugally) before returning to look for work. I expect that I would be able to find another job within 4-5 months max (in the current economy at least). So if I ever get RIF’ed (laid off) or let go for any reason, I would walk out of my employer’s doors with a smile. Having the ability to afford to do that would give me incredible piece of mind.
Is a One Year Emergency Fund Overkill?
The answer is, of course, it depends. I think it makes sense for me. Some may think that 1 year of living expenses is too much for anyone to keep lying around somewhere (not invested), but I disagree for a few key reasons.
Reason one – My current living expenses are relatively low (~$1,250). If someone has 6k, 7k,or 8k in monthly living expenses, then yeah, 12 months of that might be a lot to keep in a super low-interest bearing account.
Reason two– I am a household of one supported by one income. I have neither a spouse/partner to fall back on nor additional streams of income (at least not yet) to support me if I lose my job.
Reason three – The Great Recession. Enough said right there. If you were unemployed during that time, it wasn’t pretty. It took some people a year or more to find work. If we have another massive economic downturn, it could affect my industry, and my job, and my ability to find another job. See reason number two again.
I don’t yet know what dollar amount I will target as my fully-funded emergency fund. I’ve got a few years before I need to deal with that, and many things in my life could change in that time. For now, weaving my emergency safety net is a priority.
“Debtor’s prison is real, and opportunity cost is a bitch.” (DDSW) (All posts on one page)