If you have searched the internet about Financial Freedom you have come across the concept of Emergency Funds. Ideally, this is around 3 to 6 months of your monthly income or expenses.
An Emergency Fund is an amount of money that you set aside in case you lost your income. It also acts as a buffer to avoid touching savings or investments during emergency expenses.
Most of the books and internet articles we read says that it should be based on monthly income, there are a few that says it should be based on Monthly Expenses.
READ: You can also check out Why You Should Have an Emergency Fund
Should an Emergency Fund be based on Monthly Income or Expenses?
Just like any other Financial Freedom concept, an Emergency Fund does not have a hard rule on how much it should be and what it should be based upon. It really is up to you to decide. Therefore, we can only tell you the what and why based on our experience.
For us, we decided to base it in our Monthly expenses. Below are the reasons why.
Varying Multiple Streams of Income
We have multiple streams of income. My day job gives me a constant amount of income per month while the other streams of income changes monthly. If we were to base our Emergency Fund on the income, we will not be able to know which month to base it on.
What if I get an increase? I need to catch up again to reach my 6 months of monthly income to reach my target Emergency Fund.
Monthly Expenses does not change regularly
“If I were to lose my job, how many months can I survive without an income?” This is the question we always ask when we check the status of our Emergency Fund. This question is based on Monthly Expenses, not on Monthly Income.
Living below our means
Let us say that my monthly net income is ₱30,000 and my monthly expenses is ₱20,000.
If my Emergency Fund is 6 months of my monthly income then that would amount to ₱180,000.
If the Emergency Fund is based on monthly expenses then our goal would be to reach ₱120,000. A much lower and easier amount to reach compared to basing it on monthly income.
Having your Emergency Fund based on Monthly Expenses is easier to reach and less complicated since it does not change regularly, it is still better to have a bigger Emergency Fund.
The bigger your Emergency Fund is, the longer you can live without an income.
Currently, my wife and I have an Emergency Fund amount up to more than 5 months of living expenses and slowly we will be reaching 6 months. We do not plan to stop there, next goal is 8 months, then 10, then finally to reach 12 months.
Do you base your Emergency Fund on Monthly Income or Monthly Expenses? Let us know in the comments below.