I am trying to review my emergency fund to make sure it is adequately funded. Historically I seem to include too much into my budget. It is unlikely that my husband and I are both going to be unemployed for 6 months. I'd appreciate some input into whether I'm being overly conservative, putting too much into the emergency fund. (Once this is fully funded I am planning to start a major home renovation project, and I don't want to put that off forever either.)

I know I need to include things like my mortgage payments, food, life & auto insurance, utilities, basic clothes for my kids. We'll still have some vet bills for our dog. I will leave in dry cleaning, because even if we are out interviewing we'll need clean clothes. Homeowners insurance & RE taxes are included in the mortgage bill. I can leave off dining out, and most of the sports, gift & vacation budgets. I'm not including my kids' after-school care because most interviews could be done while they are at school. We have no debt other than mortgage.

But I'm struggling with the gray areas. Given the price of oil, am I being too conservative if I include my annual heating bill at $5 a gallon, in case the 6 months of unemployment is Nov-May? Should I include a couple hundred dollars in case my car breaks down? Are there any important areas I'm missing?

Do whatever makes you sleep easier at night. There is no set in stone formula, and an emergency fund isn't just for unemployment. It's meant to be a cushion for any kind of unexpected necessary expense (medical, loss of income, repair, disaster). When people say 6 months of living expenses, that means figure out how much it will cost to exist for 6 months. I don't know why they say 6 months, but generally that's a very large amount which will cover almost any unexpected expense.

My husband and I were both between jobs for longer than that once. When my husband did get a job, they laid him off 6 months later and he was out for another 3 months. It happens, even to those of us with excellent work records, advanced degrees and so on.

I would include after-school care. If you were ill, you might need the support. Also, if you lost your job, would it make sense to keep paying (even if your kids didn't go), so that you don't lose your spot? What if you got a job and didn't have care available right away?

As for the emergency fund, you don't have to have it all liquid. You could have a month of expenses in a high interest account, 5 months' worth in CDs that you can cash upon notice, and say 3 months more in ETFs or something. (Someone will now come in and freak out at the ETFs. But note I said 6 months in other more accessible deposits. You can afford to take a few risks if you go beyond the basic fund.)

I favour 6-9 months of expenses. Six months is not really a lot. If the economy falters or you're injured or ill, six months is not long.

i'd say traditionally an emergency fund is understood as living expenses when you have income disruptions, so i think it should be called an income disruption fund, but that's just me. you can call it whatever you want to and include whatever you want to for however long you want to. everyone has different ideas about what is necessary to live and has different degrees of living comfort. so it really is an individualized concept.

if your career field(s) have a high probability of layoffs, then you probably want a larger emergency fund that covers for a longer period of time. if your career field(s) have limited employment opportunities, competitive hiring, etc, this means that the loiter time between jobs is more than likely much longer, so you'll want to have an emergency fund that would last that long. don't forget that if you are taking an average loiter time, that you still want to cover a period that lasts beyond when you start work since you aren't going to get a pay check for at least 2 weeks. if someone has a chronic health issue or is prone to requiring health care, then beef that up. if you know you have things that are towards end of life (water heaters, cars, etc) you probably want to beef up emergency fund.

i think of my emergency fund as a perfect storm scenario of no income and two major incidents (something like a major car repair and medical treatment) occurring at the same time. i think you are missing something for medical care, car and house repairs.

as far as where to put all this money, you want the amount of money to be available when you need it. if you put the money into a riskier venture, then you are taking the risk of not having the amount that you determined necessary to cover your emergency. this defeats the purpose of an emergency fund, because now you will have to tap other resources taking a lost, penalties, etc, since you do not have the full buffer you expected to have and which is the reason for having an emergency fund. of course if an apocalyptic incident occurred, then you would more than likely have to liquidate other resources, but you are trying to avoid having to do this with the buffer of an emergency fund. your emergency fund is also not an investment fund and shouldn't be treated as such. if the economy falters as it is doing now, money in the market could fall considerably as it has done for the past 9 months.

We calculated our emergency fund as follows:

3-6 months worth of our monthly living expenses. Living expenses is not the same thing as our total budget. Our total budget includes saving for retirement, spendable money for each of us individually, etc. Living expenses are expenses we would actually incur each month like groceries, gas, utilities, mortgage, etc.

We do not include car or home maintenance, or eating out. If we both lost our jobs you better believe we wouldn't be eating out.

It really comes down to what you are comfortable with on whether or not you need to add in additional funds for car emergencies, etc.

if you were to lose your job, you'd need to pay for medical insurance premiums and if you were to also get sick, you'd need money for coinsurance. personally, i'd stick away enough for a few months of self-insurance premiums and an anticipated out of pocket max amount for the kind of policy you'd look into.

but i've got someone who uses a lot of healthcare at home so my outlook is different.

I was going to say the same thing. COBRA payments for me would run over $500/mn. Auto deducted now thru employer is only about $78/mn. That is a huge extra expense most people aren't used to paying. I add an extra few thousand to the 3-6mn living expense rule when calculating the "right" amount.

what my fiancé and I have been doing is saving for a specific amount. somewhere along the lines we calculated our typical monthly expenses, cut down to the "omg we have no money" minimums (isn't that just too familiar...). if he lost his job, our student loans would go back to minimum payments. we'd get rid of netflix. no more dining out, etc. then we multiplied that number by 6. that's our goal. at this point in our lives, with no mortgage yet, and no CC debt, I think the six months' amount is a bit high for us and we could get by with three probably. since we've reached about the three month mark, we haven't been as aggressive saving for our emergency fund. we keep it in ING.

so it's different for everyone. we're obviously not accounting for the worst worst-case scenario, because we're young and healthy and have some relatives to rely on in dire need. but for others, a larger emergency fund is probably a good idea.

I manage all of my finances on what started as a relatively simple Excel workbook three or four years ago. As I've maintained it over time (and increased my assets), it has gotten more complicated, but regardless, I categorize every expense. Because I know how many days I've been keeping this log, I can average each category by day, month, and year. For my mythical "6 months of living expenses" I simply take my monthly average of expenses and subtract my average monthly "savings". This savings is essentially money I currently put into building my emergency fund - not savings through my employer-sponsored retirement plans. Sure, this in some ways overestimates my expenses since in a true emergency situation I would likely cut any fun/entertainment expenses and reduce any other luxuries that are included in this average, such as above-minimum payments on my student loans (I have no credit card debt). But these "extra funds" would likely (hopefully?) offset additional expenses incurred by the "emergency" such as private health insurance and whatever other unknown.

I also realize that my situation is a little simple since I am less than five years out of college, single with no dependants, and have fairly high job security in a municipal government position. However, should an emergency occur, I do not have familiy or others on whom I could rely for finiancial support. As a result, this method is as true as I can get to the recommended "6 months of living expenses". The best news is that I'm within just a few months of reaching my goal!

Don't forget about Uncle Sam. He's set it up such that you'll (likely) have some 2/3rds of your previous income paid to you with no strings attached for months on end. Come to think of it, does anyone factor that into their calculations? I never have, but I'm always very conservative about saving. (unemployment benefits, that is)

I mentally walked through scenarios that would lead us into our emergency fund, and tried to figure out how bad things would need to get for us to use our funds to make these decisions.

I concluded that we need to be conservative with the first three month's funds, but we can really relax for months 4 to 6. We will only hit those funds if we have a major disastor that isn't covered by unemployment insurance, short-term and long-term disability insurance, maternal leave, life insurance, or health insurance - or if I lose my job AND we have a major emergency at the same time. We also know that we can sell our house and buy something smaller, my DH can go back to work (he is currently a SAHD), and DH and I have both been poor before - so even if we start to run out of money, we know how to handle the situation. Basically, the 4 to 6 month cushion isn't intended to maintain our standard of living - it is there to help us transition to a lower-cost lifestyle after a major event (our house burned down, I was fired and then hit by a car, I become pregnant with quintuplets, the country hit a Great Depression, you get the idea).

Our choice is that we will put a conservative 3 months into a high-interest savings account (we are just starting our emergency cushion - we just got back on our feet from the mild poverty mentioned earlier). So we would probably include the high gas costs, etc., and be really conservative in our estimates here. In reality, I just round our expenses up to the nearest thousand and call it good . . . we're pretty lazy with our budgeting, and it's all really a trade-off; if we save more, we get more security, but if we invest more we get more money. I don't have strong feelings about which is more important, so I don't worry about the details (you may want to consider if you really care, and if you don't, just do the same).

We will then put another three months into some other investment vehicle - we're still figuring out what, but we're going for something more volatile with a good chance of higher returns over the next ten years. If I lose my job and my cushy benefits, we'll probably wait until the market seems healthy (sell high) and then move the money into a more conservative account to protect our longer-term cushion until we feel as financially secure again.

Maybe it would help to think of the extra security you get from saving a little more as something you are purchasing, and weigh that security against other things you want (your renovation) and decide which you want to pay for first. You can always save a little more later, if you still want a larger cushion once the renovation is done. On the other hand, renovating has opportunities for all kinds of little surprise expenses to crop up - so maybe you want to pay for the extra security in your budget first. It really is a personal decision. Note that the car breaking down is just the kind of emergency your cushion is designed to protect against - most people wouldn't plan this far in depth unless they had a car repair buget item (we do, since we bought a junker car - repairs are inevitable so we save for them each month) or unless they knew to expect a specific repair in the next year or so.

What a really good response. That's what my fiancé and I are doing for the most part; I just didn't think to phrase it that way. We are fortunate enough to be in jobs long enough to qualify for unemployment (unlike most of our poor, student years) and are fully covered by health insurance, and our jobs could give us COBRA if necessary (expensive, but cheaper than a medical disaster w/o insurance).

People who don't have those things really need to consider a much larger fund.

Heaven forbid I get pg with quints!

Thanks for your help all. I walked through the numbers tonight and the amount required 6 month emergency fund is much more than I expected. Guess I'll be moving some of my kitchen fund into the emergency fund, increasing my monthly savings a bit and waiting another 6 months before I start talking to contractors...