Emergency Fund Calculator Basics
Today we’re talking about an effective and comprehensive emergency fund calculator. While you may have seen a calculator like this before, this one is different because it incorporates a few intangibles such as mental health and just how flexible you can be with your fixed costs.
Of course, we want to ensure we have enough money to cover our finances in the case of an emergency. However, we don’t want to be carrying too much because such a fund does carry some opportunity cost of not having this money invested in more productive investments.
So go ahead, download the calculator, open it in excel, and let’s step through it together.
*My apologies that this calculator is best run and used on a desktop.
I’m currently working on trying to generate a mobile friendly version.
Emergency Fund Calculator: Step 1
Fill in Your Monthly Budget
Quick Description:
Firstly, put in your monthly expenditures for each line item starting at the top and working your way down. Each line item should be self explanatory and most lines include an example if you need some. Secondly, for line items like “Insurance” sum up your total expenditures for insurance including car, house, life, etc. Your total monthly expenditures will be summed at the bottom. This was done so you can quickly see if the numbers make sense when you compare against your monthly budget.
Emergency Fund Calculator: Step 2
Can Any Items Be Reduced?
Quick Description:
Next, can any of these budget items be reduced a bit, or even shut off completely during your emergency period? Of course, some cannot when there is a contractual obligation such as a mortgage or car payment. However, some services can be reduced for a period and therefore their monthly costs can be lowered.
Here are the options:
- No – this line item cannot be reduced as there are contractual obligations behind it
- Some – this line item can be reduced a bit during this period of time. In the calculator I reduce the line item by 10% – nothing too drastic.
- Full – this line item can be completely reduced to zero.
Emergency Fund Calculator: Step 3
Optimizers & Influencers
The tricky part with an emergency fund is that not all sizes fit all. As such, this next step attempts to right-size the fund a bit to ensure we have the right amount for you and your needs.
Passive Income Sources
As you might imagine, if you have reliable passive income sources you will be less reliant on an emergency fund. Simply put, the income from these sources can offset your active income if you lose it. So sum up your total monthly passive income streams that you can easily spend in place. Just imagine if this number exceeded your budget items! Topic for another day.
Trusted Assistance
Some people have great support systems in place. If this is you, let’s rely on them a bit and get some help from them. Could they help you offset your monthly grocery bill by at least 25%?
Items of Value
If you think long and hard you might have something in your house, or a collection of things, that have value. Do you think you could round up a bunch of things and sell them for at least $1000?
Mental Health
This last one is important, and it deals with your mental capacity to handle an emergency or job-loss scenario. The fact is, our mental state and health can make a bad situation even worse. Likewise, a strong positive mindset can actually get us up and back on our feet faster.
If you have a family history, or you know you’re prone to depression, then score yourself low on this. The calculation behind this is to increase your fund by the amount of your monthly rent. So if you score a 1, then I’m going to give you one more month of rent or mortgage payment. Opposite effect if you score a 10. As you slide from 1 to 10 the amount will shift with it; 5 has no effect.
Emergency Fund Calculator: Step 4
Fund Parameters
Lastly, we want to set a few parameters which will give us our final number.
Fund Duration: 3 Months or 6 Months
Often, the first decision we need to make for an emergency fund is if we are going to save 3 or 6 months. To be honest, its very much a personal question and there is no right or wrong answer. Instead consider the following factors which would tend to make one favor a 6 month fund instead of the 3 month fund.
- You are self employed or a business owner without access to unemployment insurance
- Working in a volatile market or boom and bust sector
- Single income in your home
- You have multiple dependents
- Other investments you have are not liquid should you need to sell them
- You highly prize security and stability
Level of Curtailment on Spending
No Curtailments
Some Curtailments
Heavy Curtailments
Some people can implement a series of heavy curtailments, almost draconian in some ways. If you’re able to implement some heavy curtailments then we calculate the “some reductions” at 85% of normal and drop the “full reductions” by 100%.
Include Influencers
Lastly, you have the option to add and include the influencers from Step 3 or to skip over them.
Calculation Examples and Scenarios
Straight and Simple 3 Month Emergency Fund (Default Settings)
If you’re after a simple straight 3 month emergency fund calculator, do the following:
- Step 1, fill out all budget line items
- Skip step 2 and step 3
- On Step 4, set fund duration to 3, no curtailment, skip optimizations and influencers
- This will give you the quick, simple calculation for a 3 month emergency fund
- When you open the calculator, these are the default settings.
Most Conservative Emergency Fund
If you would like the most conservative and therefore largest calculation do the following:
- Step 1, Fill out all budget line items
- Step 2, set all to No. We want no reductions.
- Step 3, set $0 passive income, no assistance, no items of value, and set mental health to 1
- Step 4, set to 6 months fund, no curtailments, yes use optimizations
Most Aggressive Emergency Fund
Honestly, the most aggressive emergency fund would be to skip it altogether. However, this is how you could be aggressive, but still hold an emergency fund:
- Step 1, fill out all budget line items
- Step 2, fill this out truthfully, error on the side that yes you could some reduction on most line items if not all. Mark as many as full as accurately as possible.
- Step 3, accurately set your passive income sources, then set yes and yes to the next two line items. If you don’t have any friends who can help you’ll find some! Mental health, mark this as a 10.
- Step 4, set to 3 months fund, heavy curtailments, yes use optimizations
Conclusion
Emergency funds are a critical piece of responsible fiancial planning. However they carry an element of irony, that the ones who prepare and get their financial house in order, rarely need them. While the ones who now need them are the ones who rarely prepared for it.
That being said, its better to be safe than sorry and be prepared. I hope this emergency fund calculator has been useful and give you an idea of just how you require given your current needs and financial obligations.
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