Emergency Fund: Not ‘One Size Fits All’

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Most of us can agree that we should have an emergency fund. Some call it the rainy day fund or the “OH NOOOO!” fund, but we all have a basic understanding that each new day brings with it the possibility of sudden financial burden.

The purpose of an emergency fund is to cover unexpected expenses without going into debt. This means that your ability to borrow against your credit limit is NOT part of your emergency fund. Consumer debts like credit cards are an emergency in and of themselves.

The goal of this post is to help you turn your emergency fund into merely an “inconvenience” fund.

Let’s first separate the expected from the unexpected. We certainly don’t want to use our emergency fund for expenses that don’t fit the description.

Expected (Non-Emergency) – Savings/Cash Flow

  • Car maintenance & minor repairs (oil changes, new brake pads, new batteries, new tires, tune-ups, filters, wipers & fluids)
  • Home maintenance & minor repairs (appliance wear & tear, minor plumbing, tree trimming, gutter & vent cleaning, pest control, foundation damage prevention)
  • Property taxes
  • Insurance premiums

Unexpected (Emergency) – Emergency Fund

  • Job loss
  • Disability (elimination period)
  • Home theft, flood, or fire damage (insurance deductible)
  • Major home repairs not covered by insurance (plumbing/sewage, roofing, HVAC)
  • Major medical & dental (insurance deductible)
  • Car accident (insurance deductible)
  • Family emergencies

As listed above, properly maintaining property should be cash flowed slowly over time, vs. waiting until the damage develops into an actual emergency (speaking from experience!). This is also a reminder to review the perils (causes of loss) covered by your property insurance policies. Water damage from floods is an example of a peril that requires a separate insurance policy.

So – how much should I have set aside for the unexpected?

  1. Insurance Deductibles: Many emergency costs are covered by insurance once the deductible is paid, so add up your health and auto insurance deductibles. Health insurance deductibles and out-of-pocket maximums may be kept in a Health Savings Account (HSA), which will be covered as a future topic.
  2. Loss of Income: Calculate your monthly non-discretionary expenses (NEEDS only), and multiply that by six. The popular rule of thumb is “three-to-six months of living expenses,” based on whether you have a single or dual-income household. Since I value flexibility and the avoidance of desperation, I believe that six months is the better recommendation.
  3. Property: Most major home emergencies are covered as perils by homeowners insurance – BUT since there are emergency expenses that are not covered by homeowners insurance (such as sewage line, HVAC, & roof replacement), you should include these unexpected costs in your emergency fund. Take your property value (excluding land value) and multiple it by 5% (0.05).

Add the total to determine your personal emergency fund goal.

Where should I keep this money?

Now that you have calculated your emergency fund need, it’s time to put that cash in an appropriate investment vehicle. The ability to pay for emergency expenses quickly requires this fund to be a liquid asset – meaning that it can be quickly converted into cash while keeping its market value.

Get in the habit of thinking about your money in terms of time – how quickly would you need the money. The time horizon for an emergency fund can be as little as one day and as much as six months. It is wise to keep a portion of your emergency fund on hand (in cash), another portion in a high-yield savings or money market account with same-day accessibility, and the last portion in low-volatility short-term bond funds or CDs. Always remember that your emergency fund is NOT a long-term investment vehicle.

A healthy emergency fund will not be saved overnight, but as you approach your goal, you will feel a great sense of relief. This risk management concept provides peace of mind – which is priceless.


  1. Excellent post! You brought a couple of original thoughts out in this that are just excellent.
    -Not relying on available credit
    -Separating out expected, periodic expenses vs. true emergencies

    I remember how Dave Ramsey often says that after they got an emergency fund and had money in savings “emergencies” quit happening. Do you recommend building up specific sinking funds for those expected expenses or do you just combine them into an additional cash pool somewhere?

    Liked by 1 person

    1. Thank you, Dan! It’s tempting for us to think of our emergency fund as a ‘catch-all’ for any inconveniences that come along.

      I promise that the emergencies still happen once you have the emergency fund in place, but it does turn that emergency into a mere inconvenience. We personally had $20k in unexpected expenses hit us all in 1 month, including a sewage line replacement that home insurance does not cover. The emergency fund did its job, and we didn’t have to go into debt to cover the costs – we actually benefited because the expenses were paid using an airline miles credit card, paid off in full the same month.

      I think it’s good to have the sinking fund separate from your emergency fund. It’s psychologically helpful to not think about them one in the same. Great question!


  2. What are your thoughts on having some of the fund in investments rather than just savings? I have ~15-20K in savings account EF but 5x that in a general investment fund. This ideally is for retirement (in addition to 401k/IRA) but I could pull money out if needed. As I see it, the worst case scenario is I have to pull the money out and lose some interest, but over the long term, I think I will make more money by feeding extra money in stocks rather than having all that cash sitting making 1%.

    Liked by 1 person

    1. Great question, Matt! Think about your money in terms of time, and keep in mind that cash is also an investment decision. I mentioned in the article that some of the emergency fund should be kept in cash, because some emergencies require payment quickly. Other emergencies can cause a slow burn, and extend to 6 months or more. For that part of the emergency fund, you can consider short-term fixed income securities – but always focus on stability rather than high yield. The emergency fund is not meant to be part of your growth portfolio.

      I have 1/3 of my emergency fund in my bank account for same-day liquidity, and the rest is in my taxable brokerage account, spread across low-volatility securities. Temporary expenses can typically be floated with the use of a credit card, but ONLY use a credit card if you are able to fully pay off the balance each month.


  3. You wrote, “neglect and failure to properly maintain property is not an emergency” but actually if you’ve neglected your property and failed to properly maintain it, you may indeed find yourself with unnecessary emergencies.

    The goal is to avoid those emergencies by properly maintaining it, and to do so by regularly funding a sinking fund that is accounted for separately from your emergency fund.


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