Why I Hate the Three Month Emergency Fund Rule

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There are a few tried-and-true money rules that I flat-out do not agree with. They sound like good advice but rarely work or play out in real life, as people expect. The three-month emergency fund “rule” is one of them.

What Is a Three-Month Emergency Fund?

It’s a “rule” or “teaching” of some financial “gurus” that dictates what you should have in your savings account. Essentially, it’s the amount of money you would need to live on for three months. You can figure out this number by multiplying your monthly budget by three. That’s how much you should have saved away in an emergency savings fund at a minimum. Most supporters of this rule teach that you should save up to 6 months of living expenses.

It sounds good.

It sounds smart.

I mean, who wouldn’t want to know that their life could continue on as if nothing has changed when the unthinkable happens?

But the thing is, that’s not how things happen in real life.

When Emergencies Happen, Spending Habits Change

When our clients have been hit with an emergency and are facing a loss of income or the prospect of some seriously financially strapped times, most do this one thing: they buckle down. Emergencies tend to make people go into “emergency mode.”

Instead of continuing to act as if there isn’t an emergency, they:

  • stop eating out.
  • don’t plan vacations.
  • might even temporarily halt 401(k) contributions.

Knowing this, saving three months of “living expenses” really doesn’t make logical sense. It’s just not necessary.

You’ll immediately start to reduce your spending in response to an emergency (because you’re human), so a more useful exercise is figuring out what you cannot live without and planning your fund around that amount.

How Much Should You Have in An Emergency Fund?

To figure out what you need in your emergency fund, you’ll want to analyze your monthly expenses and develop a written plan outlining the expenses you would keep, what you would reduce, and what you would eliminate entirely if and when an emergency occurs.

Let’s look at this example:

What Would You Keep?

When an emergency happens, you’ll still need a place to live. You’ll still need groceries, lights, gas…

And you may even need to ensure you don’t fall behind on things like debt payments and/or student loans.

What Would You Reduce?

If you’ve been contributing to a 401K or savings fund for your retirement or your children, you may decide to temporarily reduce the amount you’re contributing while you’re handling your emergency.

What Would You Eliminate?

When you look to eliminate things from your budget, the first things to go are often lifestyle spending or luxuries – so if you normally budget for a landscaper, manicures, a housekeeper, eating out, your daily coffee run, or a date night babysitter, these are the types of expenses that are nice, but often aren’t necessary, which makes them a good choice for elimination during financial hardship.

Now, these are just examples. Everyone’s financial situation is different, so the things that one person considers a luxury may be a necessary expense for someone else. What you need to take away from this is that you need to truly examine your financial situation and determine which expenses fall into which category for you.

Then, once you’ve created your list, total your “keep” and “reduce” amounts, then multiply the total by three. THAT is your emergency fund goal. It’s a more realistic, hopefully, easier-to-achieve amount than your current monthly expenses times three.

What if that number feels like it’s “too high?” Most people who create an emergency fund do so, assuming it will supplement the loss of income. But what if you’re in a double-income household? How likely is it that both you and your partner would lose your income simultaneously? A total loss of income is possible, but again, you need to consider its likelihood in relation to your life.

And even if you want to plan for job loss, take a look at your career and employment prospects. Let’s say you are laid off. If you’re a professional in a highly sought-after field, what are the chances of you being unemployed for three whole months? Take that into account when planning your emergency fund amount.

The flip side of that coin is if you’re in a saturated industry or live in a part of the country without many employment opportunities, three months of expenses might be the bare minimum you should save. In fact, a 6-month amount could be more realistic for you.

Your Emergency Fund Should Not Be Your Only Savings Account

Another problem with the three-month rule is that people think they are done saving once they’ve hit that amount. They’ve got three to six months of emergency funds in a savings account, so what more do they need?

Plenty. That’s our answer. They need plenty of other savings accounts.

When you have all of your savings lumped together into one account “for emergencies,” what you have is a gray area. People don’t really know what it should or shouldn’t be used for. What constitutes an emergency?

Let’s say your car breaks down. You need it fixed so you can get to work. That feels like an emergency, so you dip into your emergency fund. But the problem is that’s not a true emergency.

Cars break down. It’s not a matter of if. It’s when. And if they don’t break down, then at some point, you’ll need to buy new tires or replace a cracked windshield. These expenses go hand-in-hand with owning a car. And they are specifically why you need a separate savings fund just for car maintenance and repairs. You also need separate savings accounts for home repairs and maintenance or your next family vacation, or for buying new clothes once your kid goes through another growth spurt.

An emergency fund is meant for true emergencies and should be touched only in those instances. When you have multiple savings accounts covering all of life’s expected whammy-type expenses, you are planning for most “emergencies.” Having these accounts and structuring them this way means you are not withdrawing from your emergency savings unless it’s a true loss-of-income situation.

Don’t Get Overwhelmed and Do Nothing

I say all these things because I want you to see this fund’s amount as an achievable goal. If multiplying your monthly expenses by three produces a number that feels overwhelming, you may never start that fund. And the goal here is to create your cushion so you have greater peace of mind.

But you need to start somewhere. Begin with smaller goals. Aim to get one month’s worth of emergency expenses in an account. Once you get there, shoot for two. If you’ve got two months of expenses saved, you’ve got some traction, and getting to three months won’t seem so daunting.  The key is making this amount feel manageable so you’re more likely to start somewhere.

As financial coaches, we aim to help you gain clarity around your finances. Your emergency fund is one way that can help you do that while achieving financial peace of mind.


If you need help figuring out your savings strategy or could benefit from a one-on-one meeting with a financial coach, learn about our Power Planning sessions here.

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1 thought on “Why I Hate the Three Month Emergency Fund Rule”

  1. I appreciate your view on the three month emergency fund rule. When my husband and I were both out of work, our spending habits went out the window. We had to save every dollar. During financial emergencies, we do only spend on the necessities such as rent, food, etc. and everything else gets held off until another time. You just spend what is necessary to get by because you never know how long you’ll be without a job.

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