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Advice from “Financial Gurus” Can Lead You the Wrong Way
How to Size Your “Perfect-Fit” Emergency Fund
Your “perfect fit” emergency fund size depends on your personal situation; one-size-fits-all doesn’t work
Chances are, you know you need an emergency fund to survive financial emergencies.
However, if you research how big this fund needs to be, you’ll run into contradictory advice, much of which is wrong or at least incomplete.
The following is how I figure out how much I need to set aside, which should help you figure out your “perfect fit” emergency fund size.
Examples of Bad or Inaccurate/Incomplete Advice from “Financial Gurus”
Dave Ramsey suggests your emergency fund be $1000 (at least until you’ve paid off all your debts, which isn’t necessarily a great idea).
If your kid suddenly needs a cavity filled, your car’s alternator goes out, or something of similar magnitude happens, $1000 should be fine.
But that’s not a real financial emergency. It’s just life happening.
A true financial emergency is if, heaven forbid, you become temporarily disabled due to an accident or severe illness, or lose your job. If that happens, $1000 is not even remotely in the ballpark of enough to tide you over.
If $1000 is all you have saved up, you’ll run out of cash and out of options before the week is out!
Suze Orman, on the other hand, says you need to set aside 8–12 months of your income. While in some cases that’s true, it’s sort of like pulling an XXXL shirt off a store rack and saying that it will be large enough for you. Sure, that shirt will be a perfect fit for some, but it will be grossly over-sized for most.
Orman is right to state things in the number of months, but misses the mark in two important ways.
