Of all the boring, mundane things in the personal finance space, emergency funds take the cake. You work hard to earn some cash, and then the first piece of advice people tell you is “don’t spend it.”
Where’s the fun in that?
What’s the point of having money if you can’t spend it – or even invest it? Just leave it in cash, losing money to inflation.
Your Emergency Fund Isn’t Supposed To Earn Money
The biggest thing people need to understand when it comes to emergency funds is that the money in an emergency fund isn’t supposed to earn money.
Emergency funds are for emergencies.
Think of it as your own personal insurance policy for when shit hits the fan.
We break those rules a little bit but still keep some money in cash. That money is losing money compared to the rate of inflation, but it’s serving its purpose.
If things go south, we’ll sleep well knowing we’re covered.
But for many, the thought of having 6 months of expenses tied up in cash, unable to be spent, doesn’t help them sleep better at night.
Is “Typical” Advice Even Good?
The most common advice I see when talking about the size of emergency funds is three to six months of expenses. If you spend $4000 a month, that’s anywhere between $12,000 and $24,000.
Suze Orman is a big proponent of an even larger emergency fund – 8 months, minimum. Suddenly we need to save another $20k just to meet the ‘minimum’ amount. Not exactly chump change.
There are a few reasons we use ‘months of expenses’ for an emergency fund size instead of pure dollar amounts.
For starters, if you spend a lot less than someone else, you don’t need as much cash on hand to sustain your lifestyle if you lose your income. It’s the same idea as focusing on a savings rate.
The less you need, the less you need.
It also forces you to actually understand your spending in order to arrive at a dollar amount.
I don’t think everyone needs to diligently budget.
But everyone should know how much money they’re earning and spending each month.
Three to six months is used as a baseline because that’s roughly how long you might expect to be out of work if you had to find new sources of income.
DINKs Aren’t Typical
But being in a dual income household, we have advantages over our children-bearing peers. We don’t have any little mouths to feed; just us, and we’re not very picky.
If times get very lean, we can eat dirt cheap.
It’s also a lot easier to explain to an adult that we can’t afford to do something we otherwise would have liked to.
Kitces published an article recently that dives into this and suggested that in fact, dual income households tend to be at greater risk to income loss.
Using this as a basis, we should probably err on the side of a larger emergency fund, right?
The MwM Household Isn’t Typical
That analysis is definitely interesting…but it doesn’t really apply to us. In the event of a job loss, we’re shielded – not hindered – by having two incomes.
The analysis would hold true if we weren’t living off one income, or if the comparison were done against a family who was.
But the flaw is comparing a two income household who needs two incomes with a one income household who needs just one income.
That’s an apples-to-oranges comparison, though, and we don’t fall into the former group. We’re DINKs who live primarily off of one income.
By living primarily off the money that I bring home, we’d be fine if Kristin lost her job. Our savings goals would take a hit, and we’d definitely have to cut back to FEEL comfortable, but we could get by indefinitely.
On the other hand, if I were to lose my job, we wouldn’t be in nearly as good of a position. We could make it work – just barely – but we’d be stretching ourselves a lot to do so.
What that means, though, is that our “3 month emergency fund” could actually sustain us much longer if we lose only one income.
If we didn’t adjust our lifestyle at all, and continued to pay extra on the house, we could probably stretch our emergency fund a few extra months.
But if things really went south for me, paring down would be an option. Doing so allows us to stretch our emergency fund to about a year, give or take a month or so.
This would mean no 401(k) contributions, no saving, no vacations. No fun. But doable.
It’s All About Risk Tolerance
With that in mind, it makes our ‘three month emergency fund’ feel closer to 6. We set the bar low because we’re comfortable with that risk.
I’d rather stomach the risk there and see our portfolio grow slowly with low-volatility investments. Besides, we’re continuing to add to it each month so eventually it’ll bulk up.
Ultimately, I’ll take the risk of having no fun for a few months if stuff really goes bad over the certainty that even more of my money is losing to inflation.
It’s what leads folks to invest in different things, or not invest at all and instead pay off debt.
Risk tolerance is such an interesting concept for me to dive into because of how personal it is. I love trying to truly understand others and see their point of view, particularly when they have a higher risk tolerance than we do.
One of the luxuries of being DINKs is we’ve got more flexibility in what we choose to do. That helps our risk tolerance be probably a bit higher than others.
It also means that we need to analyze blanket advice like Suze Orman’s “8 to 12 months living expenses for an emergency fund” a bit more.
Our unique situations make continuing to talk about personal finance worthwhile. Those different viewpoints are valuable to keep exploring.
How do you assess how big your emergency fund should be?