Nate answers a listener’s question about emergency funds and how/why they are used. He also shares his thoughts on how he and Danielle are currently using credit cards.
Hey Nate and Danielle,
Can you guys talk about how you came up with the minimum 3 months for the crash fund? Would an easy way just to take what we are currently making and multiply that by 3? The wording of 3-6 months of our expenses just seems so easy but when I sat down to actually look at the math, I was quickly sinking in what that actually means. Right now we have debt, but when we are looking to start stashing everything away for a fully funded crash fund, we won’t. So obviously debt wouldn’t need to be included What if an emergency came up during that time? Do you guys stop putting in money into your crash fund to save for other things when you have considered it fully funded?
Any insight would be helpful! Thank you!
The three-month minimum is something that I was always told and I think it holds true. If you are injured at work or come down with some type of sickness, three months is good recovery time. 1 month’s worth of expenses may not be enough to cover an emergency, but three months should be able to cover almost anything or give you enough liquid cash to keep things at bay.
To get that three months you don’t need to take what you currently make, you need need to find out how much you actually spend each month on necessities (mortgage/rent, gas, car insurance, utilities, food, etc) and multiply that number by 3-6. That way, if you lose all income, you have a few months to figure out what to do while still being able to afford your bills.
If an emergency came up during our emergency fund building time, we would put all of our money towards that emergency. Once the emergency passes, rebuild your fund. Once the fund is fully built, stop putting money into it and dedicate it to something else.