Emergency Fund Cash: How Much Is Enough?
As many regular readers know, I have just become a father for the first time. When my wife and I first found out about the pregnancy, the “financial manager” in me quickly listed the following things off in my head as financial “to do” items:
- Update estate plan and will
- Increase life insurance policies
- Start education savings plan for child
- Increase monthly expense budget
- Increase emergency cash fund
Where To Start?
The biggest thing on my list of to-do items was to increase the amount of money that we saved in our ING Orange Savings Account cash reserve fund each month.
The reason that this was the most important thing was because the money in a high yield savings account could be easily re-directed where it was needed most. There were several larger items that we had to purchase. We tried to purchase the majority of the required items second hand (except for a car seat for safety reasons).
In addition to physical items for the baby’s care; we also had to do some minor renovations to our house such as painting the nursery room, decorating and updating the air exchange system. All of these require cash!
New Financial Territory
While I am OK with the increased spending due to the addition of another member to our family, it is very unfamiliar territory to me financially. Because it is such new territory for our family, we are going to begin tracking our monthly expenses even more closely(using Quicken) until we can determine the actual additional requirement. Prior to that, we have decided on a relatively arbitrary amount to add to our cash reserve.
We decided to add an additional 5% of our net income to our emergency fund due the arrival of the baby. This figure was arrived at by using a rough estimation of the added cost of the baby’s essentials to our own essentials. Of course everyone has a different interpretation of “essentials”, but I am still wondering if this amount is enough?
I will certainly find out how close my estimates have been after a couple of months of tracking the expenses in our new catgories…What do you think of my estimates?
9 Responses to “Emergency Fund Cash: How Much Is Enough?”
By Brad Hart on Apr 21, 2008 | Reply
Unless you have so much money that you really don’t know how much money you have, you can never have enough extra cash. You do put forth some good ideas here and I am glad I found your blog since we are several months behind you in the new baby arena.
By moneygardener on Apr 22, 2008 | Reply
Hey Tyler,
My wife and I just had our first about 3 months ago. After all of the first initial expenses (items that you have to buy that you didn’t get for gifts), there really is not that much expense. Diapers are the biggest repeatable expense. Clothes can be obtained as hand me downs from relatives, or you can find a good used baby clothes store where you can really save a lot of money. In the end I don’t imagine our son has added much to our expenses. Perhaps 5% but you really won’t notice it…
By Jake on Apr 22, 2008 | Reply
Tyler,
Congratulations on the baby. I felt exactly the same when my first child was born. I immediately setup a 529 plan when she was born eight years ago. I started small at first contributing $100 per month and treating it like another bill. I gradually moved the amount to $225 per month. $75 split between three different investment options.
I did the same for my son when he was born three years ago. I don’t pay much attention to these accounts. However, once a year I enter all the transactions into Quicken. It is pretty incredible to see how just a small amount of money invested every month can grow.
I have to admit my wife has been after me to get a will done.
Good luck,
Jake
By Dividends4Life on Apr 22, 2008 | Reply
Congratulations Tyler! Your life will never be the same (in a good way). Enjoy the sleepless nights now, they grow up way too quickly.
Best Wishes,
D4L
By Tyler on Apr 22, 2008 | Reply
Thank you all for your congratulations and good wishes. I hope to get back to updating this site on a more regular basis once things settle down a bit here.
I have been out of the loop for a few days and am trying to get back into the swing of things.
Thanks again for the comments!
-Tyler
By FCC on Apr 22, 2008 | Reply
Tyler,
Congrats on the baby! I just wanted to throw in my two cents. I’ve always found that three to six months of expenses was enough for an emergency fund. You figure the worst case scenario is you lose your job and hopefully by the end of six months you have a new one.
Keep up the great work
By Matt on Apr 23, 2008 | Reply
I think us in the middle class to higher middle class are bunch of programmed monkeys. We do and say the same things. The one area of your financial statement your not working on is the income side. That is why me and all of us will be stuck in the rat race of life. Savers and Losers, Cash is trash. Cash flow is king!!
By moneymonk on Apr 28, 2008 | Reply
@moneygardner- “Diapers are the biggest repeatable expense”
I agree, after that it’s not that bad.
Once we had our first, I think we was over dramatic. We spent no more than a $1000 bucks on baby furniture and diapers during the first year. The rest came from grandparents and baby shower.
But of course each parent is different