Appropriate Emergency Fund
Course: Fundamentals of Financial Planning
Lesson 3: Personal Financial Statements
Student Question:
Hi,
Why is the answer to review question down below 22,500 (only 3 months of income needed)?
I would have thought it would be 45,000 (six months of income needed).
I thought six months would be needed since they (1) both did not have an additional source of income and (2) both had 60,000 salary each. What is considered enough “substantial income” to put them in the three month category?
How should I think about this and balance those two criteria?
REVIEW QUESTION
Mary and Manny are married. They both earn about $60,000 per year. Their “required” monthly living expenses are $7,500 per month. Neither spouse has an additional source of income other than their earnings. Mary has $2,400 in her money market account. Manny’s checking account usually runs close to zero, but he has a $3,000 balance in a savings account. How large should Mary and Manny’s Emergency Fund be?
$22,500
$45,000
$15,000
$30,000
Instructor Response:
Hi
Great to hear from you.
From the page titled “The All important Emergency Fund”, down below is how we define 3 months versus 6. I have highlighted the pertinent text for this review exercise.
And then in terms of what is substantial, I would say you won’t really ever have to make that determination on our exam or a CFP Board exam. I would tell you to look at whether each has an income. If one spouse makes $60,000 and the other makes $10,00 – then I’d say 6 months. But as long as both have similar salaries, don’t worry about them being “substantive.”
Let me know any questions!
There is a consensus among financial planners regarding an adequate size of an EF that the CFP Board considers appropriate:
The EF should generally cover three months of “fixed and variable” expenses if:
- The client is single and has an additional and reliable source of income other than earned compensation.
- The client(s) is/are married and both spouses have substantive and reliable earned income.
- The client(s) is/are married and one spouse has an additional and reliable source of income other than the earned compensation of one spouse.
The EF should generally cover six months of “fixed and variable” expenses if:
- The client is single and does not have an additional and reliable source of income other than earned compensation.
- The client(s) is/are married and they do not have an additional and reliable source of income other than the earned compensation of one spouse.
