Calculating a Rainy-Day Fund
This calculator can be used to determine how much savings you should have in case of an emergency. The calculator needs a total of fourteen inputs, including:
- Any current savings that can be used in an emergency. This would include cash deposited in checking and savings accounts
- Monthly living expenses including mortgage or rent payments, homeowners insurance, and money spent for household repairs
- Monthly expenses associated with non-discretionary travel such as a car loan, automobile insurance, fuels, repairs, or a monthly mass transit ticket
- Monthly personal expenses such as a student loan, life insurance payments, and medical and / or dental insurance payments
- Monthly household expenses including utilities (water, natural gas / propane / fuel oil, electric, cable / streaming services, cell phone plans, and sewer). These expenses also include food / groceries as well as minimum payments on credit cards
The calculator then provides the user with three sets of outputs:
- A total of the monthly expenses, which is a sum of the calculator’s inputs
- The recommended minimum savings in an emergency fund, which is equal to three times the total monthly expenses
- The emergency funding need, which is the difference between the minimum savings and the actual savings
- The calculator provides a second view of this same information, this time using the optimal savings value, which is equal to six months of the total monthly expenses
Note: When evaluating monthly emergency expenses as part of a financial planning scenario, the approach should be to include essential expenses, which are those that require a payment each month and exclude discretionary expenses, which are optional.
Why Create a Rainy-Day Fund?
The most compelling reason to create a rainy-day fund is the potential loss of a job, which means the loss of income. Unfortunately, the monthly bills keep coming and the loss of income coupled with ongoing financial obligations means you may have to start drawing down funds from a savings or checking account. Since most of us in the United States are “employed at will” our employers can terminate us for any reason and without incurring any legal liability. So there is always a risk of losing your job, no matter how small that risk might be. This is true for the self employed too.
The Great Recession and the COVID 19 pandemic are good examples of an extraordinary time in terms of an increase in unemployment. According to statistics gathered by the U.S. Bureau of Labor Statistics in the years 2005 through 2009, at the peak of the Great Recession, there was a 50% chance a job would be found in less than nine weeks, which works out to about two and a half months. Therefore, we’re saying a minimum emergency fund should consist of at least three months of essential expenses.
That same set of data also reveals there was an 80% chance a job would be found in less than twenty-seven weeks, which is just over six months. That is why we’ve set the optimum rainy-day fund at six months of essential expenses. The lesson here is that while going through a recession can be a painful financial experience, they often last only a few years and someone with valuable skills should be able to find a job in a relatively short timeframe – somewhere between three and six months.
Monthly Expenses Used by our Calculator
While we tried to make this calculator efficient in terms of gathering diverse types of household monthly expenses, it is impractical to account for all types of expenses. Our list of fourteen inputs serves two purposes. The first is to save you some time thinking about possible monthly expenses that need to go into the emergency fund. The second purpose is to provide guidance in accounting for various categories of expenses. For example, essential expenses typically fall into the four categories we’ve included: those that involve your home, traveling or transportation, personal expenses like student loans, and those costs we often take for granted like electricity and food. And while someone might be quick to point out we have not included essential items like clothing, the idea here is that during an emergency you would forgo the purchase of new clothing for several months until you’ve secured a new job.