Emergency Funds 101

There’s no one-size-fits-all formula for how much you’ll need.

- EMMA PATCH

EMERGENCY FUNDS TYPICALLY FALL into one of two broad categories. One is set up to handle unexpected expenses—say, when your car breaks down or your water heater springs a leak. The other is there to provide income if you lose your job. You should have both types, but when it comes to keeping a roof over your head, the second is the most important.

Your personal circumstances will dictate how much money you’ll need if you lose your job. If you’re the sole wage earner, you should have six to 12 months’ worth of monthly expenses set aside, whereas dual-income households can normally get away with three to six months of emergency reserves, says Jamie Lima, a certified financial planner in San Diego.

However, if one or both members of a dual-income household work in a sector sensitive to changes in the economy, you may need to save more. For example, if you’re employed in the travel-and-leisure sector, which experiences a lot of ups and downs (lately, mostly downs), you may need to cover more than six to nine months of expenses. Conversely, if you work in an industry that’s less sensitive to economic swings, such as a public sector job, two to four months of expenses may be enough. But spouses who both work in the same industry may need to save at least six months of expenses in an emergency fund because both could be laid off at the same time.

When calculating your monthly expenses, focus on the basics, including housing, transportation, food and health insurance, along with any other insurance you may need, such as homeowners and car insurance, says Eliot Pepper, a CFP and co-founder of Northbrook Financial, in Baltimore.