Let’s talk today about how size matters – the size of your emergency fund, that is.
People have different feelings about emergency funds. Some people say to keep at least six months of living expenses. Others say that while you’re paying down debt, it makes sense to throw every buck you have at your loans (since the loans are accruing interest, compared to your emergency fund, which probably isn’t doing anything for you).
Mr. DebtFreeJD and I have always kept a pretty large cushion of cash – maybe unreasonably large, considering the amount of loan repayments I have. Like at least $15,000 large (but usually more). For a while that was just inertia, but now I actively aim to have between $15,000 and $20,000 in our checking/saving accounts at any one time.
Well, not too long ago, we had an emergency. A big honkin’ one. With lights and sirens and ambulances. I was out of work for about four months. And boy were we glad that we had that rainy day fund when it started pouring down craziness.
Here’s the thing about an emergency fund. When you’re young, healthy, and working, it seems like you’re never going to need that umbrella. But when the storm clouds move in – and sometimes they do that regardless of the weather forecast – you are going to be sorry if you get caught in a downpour without any protection.
Honestly, at the end of the day, most people are probably going to be OK even without an emergency fund. There’s almost always some other kind of safety net – parents, charities, social security, credit cards (ugh) . . . something to carry you through a short-term crisis. But if you need to break the glass some day, having an emergency fund is incredibly stabilizing during the actual emergency. People talk about having an emergency fund big enough to let you sleep at night. That’s good advice in ordinary times – it is definitely comforting to have an emergency fund even when everything is going get. That is nothing in comparison, however, to having an emergency fund when everything around you seems to be falling apart. If you’ve lost a job due to downsizing, or have a health problem so serious you need to be out of work, or have some other enormous catastrophe going on, the absolute last thing you want to be thinking about includes: How will I pay my rent this month? What will I do when my law school loans come due? If I write this check, will it bounce? Etc. etc. etc.
In sum, having been there, done that, I’d say: keep an emergency fund large enough to let you sleep at night . . . during an actual emergency.