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

What Is the Three Month Emergency Fund Rule

It’s a rule that says you should have in a savings account the amount of money you would need to live on for three months. So take your monthly budget and multiply it by three. That’s how much you should have saved away in an emergency savings fund at a minimum. Most proponents of this rule actually say you should have up to 6 months saved away.

It sounds good. It sounds smart. 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 it happens in real life.

When Emergencies Happen, Spending Habits Change

When clients of mine who have been hit with an emergency are facing the loss of income or staring down the prospect of some seriously financially strapped times, most do one thing: they buckle down. Emergencies tend to make people go into emergency mode. They stop eating out, don’t plan vacations, and might even temporarily halt 401(k) contributions.

Knowing this, saving three months of all of your expenses doesn’t make sense. It’s just not necessary. You’ll immediately start to cut back so a more useful exercise is figuring out what you cannot live without and planning your fund around that amount.

How Much You Should Have in An Emergency Fund

Analyze your monthly expenses and come up with a written plan that outlines which expenses you would keep, which you would reduce, and which you would eliminate entirely should an emergency occur. For example:

  • Keep: The basics like mortgage/rent, car payment, groceries, and utilities. This list for you may also include student loans or other debt obligations.
  • Reduce: Let’s say you’re contributing to a 401K or a savings fund for your children. You might choose to reduce these amounts temporarily while you’re undergoing this financial hardship.
  • Eliminate: These are generally some of your lifestyle habits or luxuries, so things like a dog walker, landscaper, a weekly manicure, a housekeeper, eating out at restaurants, a daily coffee purchase, etc. These are the types of expenses that make life easier but aren’t necessary.

These examples are just that. Everyone’s financial situation is different, so what is a luxury for someone may be a necessary expense for someone else. The key is you have to truly examine your financial situation and determine what expenses fall into these categories for you.

Whatever your list is, add up that total and multiply it by three. There is your emergency fund goal. And it’s a more realistic, hopefully, easier to achieve amount than your monthly expenses times three.

But even that number might be a little high. Most people create an emergency fund assuming that it will be to supplement the loss of income. But what if you’re in a double income household? How likely is that both you and your partner would both lose your income at the same time? A total loss of income is possible, but again, you need to think about 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 a lot of employment opportunities, three months of expenses might be the bare minimum you should save. A 6 month amount could actually be more realistic for you.

Your Emergency Fund Should Not Be Your Only Savings Account

Another problem with the three month’s rule is people think once they’ve hit that amount, they are done saving. 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 that 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.

The emergency fund is meant for true emergencies and should be touched only in those instances. When you have multiple savings accounts that cover all of life’s expected whammy-type expenses, you are actually 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 of these things because I ultimately want you to see this fund’s amount as an achievable goal. If by 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 month’s won’t seem so daunting.  The key is making this amount feel manageable, so you’re more likely to start somewhere.

Our goal as financial coaches is 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 Eureka sessions here.