The other day an interesting topic came up in a discussion for my post on signs when you should quit your job. Loyal reader Trevor brought up the point of saving 6-12 months worth of living expenses before pursuing any business ventures. Then another loyal follower of Studenomics, Tom, asked about what someone should do if they don’t have 6 months worth of living expenses saved up. This brought up an interesting question for me; how much money should a new graduate put towards an emergency fund?
To be perfectly honest I don’t have an answer to this question. I have been reading many personal finance blogs that constantly stress the importance of an emergency fund and various investment vehicles for these funds. The only problem is that me and many of the great readers of Studenomics are 20 somethings that are no where close to having a family of our own. Most emergency funds state that you need at least 3 months worth of livings expenses for your whole family. Jeff Rose states that if you have a sales related job you should have 12 months working of living expenses in an emergency fund.
So this brings us back to the original question that I still can’t answer; how much money should a new graduate have in an emergency fund? Yes I realize that I have not discussed the whole emergency fund at all on this blog so you should expect a few quality posts on emergency funds in the coming weeks. Today I will provide you with key points so that YOU may determine how much money belongs in your emergency fund:
Risk tolerance. If you plan on working the same job for many years to come then maybe you should focus on slowly building your emergency fund. If you are someone that likes to take chances with their career or if you plan on pursuing new business ventures in the near future then you should definitely consider having a decent sized emergency fund.
Adversity quotient. How quickly can you bounce back from a failure? If you are the type of person that will take one giant chance, fail, and then sulk for the next year then you definitely need 12 months worth of living expenses saved up. If you have the ability to turn an obstacle into an opportunity or to bounce back from a failure immediately then maybe building an emergency fund shouldn’t be your main priority.
Job security. This is arguably the most important point to consider when working on your emergency fund. How safe is your job? During a booming economy you could be working in finance making a fortune and laughing at the thought of an emergency fund. During a recession we must all consider the importance of an emergency fund, no matter how lucrative your current position may be. Some industries are recession proof while others collapse as soon as there is the slightest economic downturn. For the sake of your future, take a realistic look at your current position and ask yourself this question, will I still be employed in a year from now? If you feel the answer is no then I suggest becoming very aggressive with your emergency fund.
Final thoughts… Studenomics is not meant to be a blog where I tell you what to do or how to do things. We are all here to help each other and I have a lot to learn from the readers. In this article I simply provided a few key points for a new graduate to consider when building an emergency fund. Now it’s time to turn it over to the readers, how much is in your emergency fund?
I'm a 24 year old dude that studied finance in school and now wants to make it fun. Over the past three years I've been helping readers like YOU make more money and keep more cash in your pocket. I've appeared live on Fox Business News and I've been mentioned in the NY Times.
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I’m a 20 something only a few years out of college and support only myself. However I’ve got a plan for once married, with kids, and all that for your emergency fund. It works for the single broke types as well.
For each person that works have 10% of their income in an emergency fund. For each child 5%, and for each pet 1%.
So if you make $50k your emergency fund should be $5,000. Get married to someone who makes $30k, and the fund should be $8k. Throw in a kid and it grows to $12k. Pick up an accident prone Boxer like I’ve got and your Emergency Fund is $12,800.
That sounds like a lot, but if you’re just out of college and make $30,000 a year than the fund is just $3,000.
Remember this is a rule of thumb, you should always adjust your system to fit your needs.
The magic number for the emergency fund is a mystery. When I started my business, I was also working two part time jobs and trying to live the dream on the side. I wanted to know I was at least getting a paycheck from somewhere, so that if the new business had a rough month, we could still survive.
Because of that, I only had a 1 month emergency fund. That was fine for ME, because if things fell apart, as a 20-something, I was confident I could find some type of part time gig to supplement things.
But I agree with the point made that you have to find what makes sense for YOU and YOUR situation.
I’m graduating in… oh god… 4 weeks? (Yes, 4 weeks.) My emergency fund is just below $500 right now. I’m mostly working on what I called my “Getting Established” fund – money for apartment security deposits, moving expenses, sending out resumes, work-related clothes. It’ll double as an emergency fund, as well.
Thanks for the feedback guys. I am really curious to see how other people my age deal with emergency funds.
@the weaknomist I like your take on the 10% emergency fund. That seems very doable.
@Grant Baldwin You seem to have a higher risk tolerance than most people. I like how you are confident enough in yourself to not stress about money too much.
@Stepahanie PTY That’s a very interesting idea, a “getting established” fund seems like something every young person should try. Would you advise putting in 10% of your income as the weaknomist did?
I don’t remember where I first heard of the idea of a “getting established fund” (herein referred to as an GE fund) – I swear it was Suze Orman, but I can’t find anything in her YF&B book about it. It’s also entirely possible that I made it up myself (a google search leads to my site) and I can’t remember that I did that… but I doubt it.
As to how much you should put in it? Well, since you should be saving up for it in college, not after (because after is when you need it, in fact, you’ll probably start drawing from it during the last semester), it should be an amount, not a percentage. I’d say somewhere between $3,000-$5,000 (in USD or Canadian dollars). It’s a big cushion, but it would cover security deposits, moving, and getting a few suits and maybe even some very, very basic furniture (I’ll be needing to buy a bed).
One size definitely doesn’t fit all with regards to emergency funds. A lot of good parameters are listed above. You should also look at how much debt you have. You don’t want to not be able to make credit card payments, car payments or mortgage payments because you lost your job. Also, you should think about what your deductible is for different types of insurance. You want to be able to cover these deductibles.
Everybody defines emergency differently. How do you define emergency? Is it losing your job? Is it getting in a car accident? Is it a fire burning your house down? Is it an expensive medical procedure?
I graduated 9 months ago and have an emergency fund of $10k. About 8 months expenses at my current spending rate. If I lost my job or something I could cut back and turn that into about 12 months.
I have that with no fear of myself being laid off. I also am rather risky in all of my investments. I just am not naive about what could happen and want to cover my bases.
@Ken thank you for the kind words.
@Vik Dulat Treating every paycheck like it’s your last sounds like a great idea but the unfortunate part is that many people these days really don’t know if it is their last pay check.
@Frank $10k that’s a really solid emergency fund! That’s more money than most people have in their savings account or retirement account. Congratulations and I hope to see you around Studenomics.
The rule I was given, was about 3 months of bills. This seemed like a good rule, until the past year when people were running through 18 months without work…
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