How much for an emergency fund

uncreative

What do people usually keep for an emergency fund, how do you quantify it?

I have picked £5000 and thankfully after help from this site and the DFW boards we are debt free and saving like mad.

After a payrise our household income is net £5,937 and we manage to save £3,000 a month now. Our total running costs (that could still be cut back to around £2,500) are also around £3,000.

I have seen suggestions of:
3 to 6 months wages (£18k to £36k!!)
3 to 6 months costs (£9k to £18k!!)

We are currently saving for a house but i can understand the need for the 6 months costs. If I changed my formula then i do have an £18k emergency fund but then only £2k deposit for a house. All advice I have seen so far is have your emergency fund in place first and this will look better from a mortgage application perspective.

Or forget the emergency fund, buy a house asap and then save like mad to build the fund up.

grumbler

IMO, it's at least 6-month's income.

torbrex

grumbler wrote: »

IMO, it's at least 6-month's income.

That was the figure I started with but quickly realised that a full year would be a better safety net.

uncreative

So I should have a £72k emergency fund before I can start to save for a mortgage deposit? What chance have you got.

robatwork

Chances are you won't both lose your job at the same time so plan for one of you becoming ill/having an accident that keeps you out of work for 6 months.

You could cut your costs to £2500 so take this from the largest wage one of you is earning let's say £3500. Then multiply by 6 to get £6000.

Or just pluck a number from the air, because nobody knows what will happen....

PeacefulWaters

uncreative wrote: »

What do people usually keep for an emergency fund, how do you quantify it?

I have a year's net pay. But there's no right answer.

I have picked £5000 and thankfully after help from this site and the DFW boards we are debt free and saving like mad.

That's a fantastic effort.

After a payrise our household income is net £5,937 and we manage to save £3,000 a month now. Our total running costs (that could still be cut back to around £2,500) are also around £3,000.

I think it's fair to say that you have above average incomes and above average outgoings. Make sure you're getting maximum employer contributions for pensions etc.

I have seen suggestions of:
3 to 6 months wages (£18k to £36k!!)
3 to 6 months costs (£9k to £18k!!)

No right answer. I'd use a figure of 6 months costs based on being at home. That's higher heating bills but no travel to work bills.

We are currently saving for a house but i can understand the need for the 6 months costs. If I changed my formula then i do have an £18k emergency fund but then only £2k deposit for a house. All advice I have seen so far is have your emergency fund in place first and this will look better from a mortgage application perspective.

Honest answer? The lender won't look very closely at your contingency fund. Debt levels and deposit are what they care about.

Or forget the emergency fund, buy a house asap and then save like mad to build the fund up.

If you will have spare income to do this after a big purchase then it's an option. You do open up a window of risk where you buy house, have a depleted contingency fund and then lose an income. Or two incomes.

In a perfect world you'd have strong contingency fund and deposit before buying. The world isn't always perfect though.

jimjames

grumbler wrote: »

IMO, it's at least 6-month's income.

6 months costs is more realistic.

If you lose your job, it's the costs that matter not how much you used to earn.

Jsscmm

jimjames wrote: »

6 months costs is more realistic.

If you lose your job, it's the costs that matter not how much you used to earn.

Personally, I've gone for 6 months costs and bills and debt payments as an absolute minimum. However I w expect that the day after a mortgage goes through that this would be reduced.

One option to think about if you are careful is what do you spend on now but could cut if you had to, e.g. Tv packages, magazines, regular nights out etc. For post deposit calculations of how much cushion to have you could try with out these... But be careful you aren't being unrealistic. Of course if there are spends which can be cut without impacting your lifestyle then maybe cut them now and don't wait until that job loss occurs... That way the saving accelerates!

grumbler

jimjames wrote: »

6 months costs is more realistic.

If you lose your job, it's the costs that matter not how much you used to earn.

"6 months" was just a way of calculating the figure, not the actual time term to cover.
Long-term saving target has to be much higher.

uncreative wrote: »

Or forget the emergency fund, buy a house asap and then save like mad to build the fund up.

It's a common delusion that you can "save like mad" after buying a house. Normally you spend like mad, and this goes on for years.

lippy1923

Minimum 6 months costs seems about right to me x

SuperHan

I'd say about 6 months of minimum costs.

So yes, you may spend £3k p/m, but you don't *need* to.

I'd work out the essential bills - mortgage, electricity, council tax, water, basic food costs, and have 6 months of that.

Any discretional spend (e.g. eating out, clothes, leisure activities) can stop if the worst was to happen, so you just need to cover basics.

In addition to this, as has been said above, it's unlikely that you'd both lose your job. It's advisable to have an emergency fund in the instance that you are both unable to work, but you both seem to be on above average salaries, so even if one were to go you could probably continue to live comfortably.

I'm also assuming that given the pay grade, you are both quite employable so it's unlikely that you would be out of work > 6 months. If this is not the case, it may be worth increasing the term.