Dave explains to Lewis why an emergency fund should be based on three to six months of expenses, not income.Show Transcript
QUESTION: Lewis brings home $4,100 a month through Social Security and military disability pay. His wife brings home an additional $2,000 a month. Lewis asks Dave if they should base their emergency fund level on her income only, since his is guaranteed.
ANSWER: Your emergency fund shouldn’t be based on income. I recommend folks have three to six months of household expenses set aside in an emergency fund.
I don’t anticipate your income stopping, Lewis. But income loss isn’t the only thing you’re guarding against with an emergency fund. You’re also guarding against things like an illness in the family, or if the transmission in the car goes out. There are many more crises that can come upon a family other than a loss of income.
I don’t mind if you two lean toward the three-month side of expenses, since your income is pretty stable. But always remember, an emergency fund should contain three to six months of expenses, not income.