Who Is This Blog For?

For the purposes of this blog, I will adapt the message for someone in their 20s or someone who just started their career (1-3 years after graduating college) because I’m basically reflecting on my own experience and I fit this demographic 😉

What Is An Emergency Fund?

Taking cues from Dave Ramsey’s definition, an emergency fund is designed to cover these types of expenses: necessary, unexpected, and urgent events that demand payment.


This blog post has been inspired by my last post, “I Threw Away $5000 on State Farm Whole Life Insurance”, where I summarized my bad purchase and experience when purchasing a State Farm whole life insurance.

That experience re-sparked the importance of having a solid emergency fund and how having one can really empower your life.

This blog will outline some arguments on WHY this should be your top financial priority in most situations or stage of your life.

A Step Higher: 1 Year Emergency Fund As The Standard

Use Extra Cash for 1 Year Emergency. Period

In 2017, based on my expense burn rate, I had around 9 months worth of emergency funds. Then, I took roughly 2-3 months of it and dumped it into State Farm Life Insurance. Bad move. That was approximately $5000.

Lot’s of financial blogs, YouTube channels all talk about the importance of an emergency fund. The Financial Diet has a section dedicated to emergency funds.

Jeff Rose, another finance blogger, and YouTuber, calls this fund the “freedom fund”, meaning, this stash of cash brings you the freedom to do a career change, help friends or family in need, or pay things in cash without risking credit card debt or loans, etc.

Next up, I am going breakdown of my emergency fund tiering philosophy and my take on the levels of emergency funds and the comfort level associated with each level.

How I Structure My Emergency Fund Tiers

Prior to having an emergency fund, you need to understand your monthly burn rate via budgeting. I use Mint to budget and track all my financial accounts like a hawk.

The logic behind these 3 tiering systems is to account for human fallacy: we are not perfect. Thus, there are 3 levels to rank your budgeting performances to serve as an alert to help put you back on track for the corresponding months.

Here is my philosophy on tiering a good working emergency fund:

Ideal Monthly Burn Rate

Budget the ideal monthly burn rate for you to live decently comfortable while being able to save money to invest.

This number should also be a challenging number for you to strive for each month and serve as a stretch goal quota to hit each month.

For the purposes of completing this exercise, let’s assume your ideal monthly burn rate is $2000 ($24,000/year).

We will use this as a base to calculate your sum liquid cash based on the emergency fund tiers below.

Baseline Monthly Burn Rate

Take that amount and budget a minimal emergency fund with at least a 25% markup. The purpose of this markup is to account for your more realistic, actual monthly burn rate.

Meaning, if you were to naturally spend based on your fixed and variable expenses, this should be the number that you should amount to monthly.

Therefore, this number will be $2500/month ($30,000/year).

Inflated Monthly Burn Rate

If you are conservative (like me), take your ideal monthly burn rate and mark it up by 50% and attempt to build your emergency fund on that 50% monthly burn rate number assumption.

Why even account for this contingency? Because life happens and you will not be able to budget and hit your monthly quotas consistently.

This would account for expenses like purchasing equipment, family or friend events (birthday parties, weddings, etc), or other high item unforeseen expenses.

HOWEVER, before the beginning of each month, you should review that month to look for events or activities that would demand more capital. Then ask yourself whether it’s worth that expense, then attempt to avoid incurring that expense.

You should account for 1-3 months of being in this inflated monthly burn rate as an upper budget limit contingency only.

The number for this will be $3000/month ($36,000/year) burn rate.

Breakdown of Emergency Fund Tiers & Comfort Levels (based on baseline burn rate)

Be Worried – 3 Months Worth ($7,500 cash in a savings account)

Yes. 3 months is still better than nothing. You will beat the majority of people living in the U.S. However, this is a dangerous minimum to target since an event like a layoff, getting fired from your job, or other expenses (car, health, taxes, etc).

This specific downfall will also be another “gotcha”: Unforeseen, unplanned expense outside your normal budget.

Realistically, a 3-month emergency fund might actually be 1-2 months worth when push comes to shove. As we all know, when bad things happen, it’s all at once.

Not Bad. But It Can Be Better – 6 Months Worth ($15,000 cash in a savings account)

This tier is a decent place to be. You have much more flexibility with your liquid cash. If you are able to execute on your monthly budget, then you can successfully have a burn rate of 5-6 months.

Again, always assume the worst. At this stage, the true value of your emergency fund is probably 3 months worth when bat droppings hit the fan.

Good. BUT YOU’RE NOT FINISHED – 9 Months ($22,500 cash in a savings account)

At this point, you are closer to your 12-month emergency fund goal. BUT, don’t get cocky and think you are rolling in “dollar dollar bills y’all”

Don’t be like MrAddOil and stop adding oil and be derailed from the mission at hand. I made the mistake of taking precious money that would have gone to my emergency fund, but I threw it into a State Farm whole life insurance and lost $5000.

When you arrive at this stage, you are ahead. Whenever you are ahead, keep striving to push further because pride, cockiness will destroy your goals.

You will have 5 – 8 months worth of burn rate to accommodate for the aforementioned 3 different burn rate tiers.

Ideal. Phew, You Can Breathe – 12 Months Worth ($30,000 cash in a savings account)

Good job. You should be proud of yourself at this point. You did it! You can arrive at this stage when you have 12 months worth of liquid cash in your savings account budgeted from your baseline monthly burn rate amount.

Why arriving at this state so amazing? The main reason is that your emergency fund now is flexible and powerful enough to sustain you for 12 months based on your ideal (frugal) burn rate, or at least 7-9 months based on your baseline burn rate, and at least 5-7 months based on your inflated monthly burn rate numbers.

Therefore, whenever a situation occurs (as mentioned in the “10 Reasons Why You Should BUILD a Solid Emergency Fund” section below), you are extremely prepared to handle it without stress, emotions, and fear (very reduced levels of fear haha).

Afterward, you can go above and beyond to make your 12-month emergency be contingent on your inflated monthly burn rate (which would be $36,000). THAT would be super empowering and put you way ahead of the curve. And I would highly encourage you to do that.

Next, let’s talk about the reasons (situations) why you should execute on a 12-month emergency fund contingency plan.

10 Reasons Why You Should BUILD a Solid Emergency Fund

1. You Have The Power to Say “No”

When you amassed a substantial amount of liquid, withdrawable cash; you have more options at your disposal. The most amazing thing an emergency fund affords you is the power to say “No” to the circumstances, people, situations, things, etc and say “Yes” and take actions on things that fit your goals.

Without an emergency fund. You are at the mercy of external variables that forces you to say “Yes” because you are powerless to say “No”. Examples would be a job, relationship, housing, junk food, etc.

Trust me. Being powerless to say “No” and being forced to say “Yes” to things you don’t want will burn your soul. Don’t put yourself in that position.

2. You Want Less Stress and Protect Your Wellbeing

Presently, if you do not have an emergency fund, you’ve essentially screwed your future self over. Regret is real. What’s more real is the stress, pain, anxiety, and other high emotional turbulence that comes from a lack of financial discipline and readiness.

The stress isn’t just contained in your life. It will seep into other aspects of your life: relationships, work, friendships, etc.

What will happen is your financial stress will reduce your performance in other aspects of your life because you are forced to be dependent on external resources to support your life. Consequently, if this situation lasts for a long period of time, it will hurt those aspects of your life.

3. You Can Only Depend On Yourself

Believe it or not. An emergency fund is a direct investment to yourself. If you are living paycheck to paycheck and cannot find the discipline and restraint to accumulate even enough cash to cover 1 month’s worth of living expense. You destined for failure because your financial health is a ticking time bomb.

The seriousness and direness of this point is heightened if you cannot rely on family, friends, or other persons to support you in the event of tragic events like a car accident, getting fired from a job, or other unfortunate events.

4. You Are Planning For a Future Career Change

In this day and age, people change careers or jobs 10 to 15 times throughout their lifetime. And a career change is expensive in more ways than just money. It takes time, energy, connections, and financial resources to successfully execute on switching to a different career and role.

When you have a sturdy, flexible emergency fund, the financial support frees you to value your time, energy, and other faculties that can accelerate your career change without having to balance a part-time gig or two when you decide to make a clean cut for a change.

5. You Plan to Be an Entrepreneur (or Solopreneur)

Maybe, your 9 – 5 job isn’t fulfilling or lucrative enough to sustain your invested time and effort. As a result, you have the entrepreneurship hype building inside.

Yet, in order to start, you need assurance that your monthly expenses will be met before you take risks and actions towards building a high income skill.

The very nature of entrepreneurship is “[taking on financial] risks in the hope of profit.”. To a certain degree, to make money takes money (or a trade-off in other resources) is a universal constant. 

Therefore, before you take that step of risk, hedge yourself now by building some sort of backup plan and a way out if things go south.

6. Injuries or Health Issues That Cost or Prevent You To Work

Life happens. Bad things happen to good people. One day, a sudden sickness might cripple you to the point where you cannot work.

Or a car, piano, or some external physical force hits you or chronic illness happens upon you and renders your body unable to function for an extended period of time.

During those periods, your comfort will come from your past self who prepared for such an event and built contingencies for these unfortunate situations: emergency funds.

7. Avoid Debt or Loans of Any Sort

Debt will destroy your life. For the majority of people, debt is just a part of life. It’s been pre-programmed in our society to swipe a card or take a loan to immediately acquire the object or service of own desires.

When you have a sturdy emergency fund to lean upon, you have a trustworthy contingency to prevent you from accumulating high-interest credit card debt, taking out loans from a bank with high interest, or taking loans from friends or family, which consequently, has the potential of damaging relationships.

When you have high-interest debt, you are building wealth for your debtor. With your emergency fund, you have a buffer to prevent unnecessary negative interest building debt.

8. Take a Break From a Job

Life is about balance. There is always work to do. However, it will occur in your life where you just need a long, well-deserved break.

Nevertheless, how can you do that without having anything buffer your living expenses? You guessed it. An emergency fund.

Well, in this scenario, I would coin this as a freedom fund: your cash, liquid savings freely empowers you to make a decision you actually want to make.

This freedom fund can potentially allow you to take 1-3 months off for a vacation around the world without acquiring debt.

9. Your 1 Income is From a 9 to 5 Job

When you only have one stream of income, you are a very precarious situation. Hence, when you have an emergency fund, it effectively becomes your 2nd limited reservoir stream of income for you.

In a situation where person A has no emergency fund and is living paycheck to paycheck when that person no longer has a 9 to 5 job to sustain them, they are essentially screwed because they have 0 streams of income and would to resort to poisonous streams of income: credit card or loan debt.

Whereas, person B who has at least a 3-month emergency fund, once they no longer have a 9 to 5 job. They have 1 stream of (limited) income that they can rely on to sustain their monthly financial burn rate.

Which scenario do you want to be in?

10. A Solid Sense of Accomplishment

This reason seems simple from the surface. But take this fact in: Only 39% of Americans have enough savings to cover a $1,000 emergency.

If you can muster even 3-months worth of emergency fund, you are much ahead from the average person in the U.S. That is a great feat to warrant a sense of self-accomplishment.

What’s more? You can use this positive momentum to drive further ahead.


Here are the couple takeaways and action items for you:

  1. Base your monthly budget in three tiers: ideal, baseline, and inflated monthly burn rates. This is a very human calibrated approach to keeping yourself accountable to a budget. Your goal is to strive for the ideal budget, but you will probably only hit that target 3-4 months out of the year and 3-6 months you will be hitting your baseline monthly burn rate.
  2. Take the 1-year emergency fund challenge seriously. You might not agree with me and think this is overly impossible or just incredibly difficult, however, once you arrived at this milestone, your future self will thank you.
  3. Start Now: it is a daunting task. But you just got to start and do it. Start small and then scale as your income increases. I would advise, prior to making any other financial investments (stocks, cryptocurrency, buying a house, etc), an emergency fund should be your top priority.

Was This Helpful? Please Support 🙂

I hope that this blog can challenge the way you think about having an emergency fund and spur you to take action on building one today. Now.

I would love your support by clicking into this Amazon affiliate link and go through your normal purchasing habits. Or you can join my Patreon community.

Doing this will support this blog and my other resources like my YouTube channel so I can continue to produce high quality, useful content on a weekly basis.

This blog was made to serve you. Enjoy.
This blog has been inspired by these creators: One Big Happy Life, BeatTheBush, and the Financial Diet.


Please enter your comment!
Please enter your name here