How Much Should I Save in My Emergency Fund?

How would you pay if your pet broke a leg tomorrow?

What would you do if someone totaled your car?

How would you pay if your water heater/roof/furnace had to be replaced?

Hopefully you wouldn’t have to use plastic to pay for an expected situation, and you’d use money you saved up.

An emergency fund, or a rainy day fund, is money you’ve accumulated in a dedicated account to pay for life’s little crises. This is not a “OMG I need that large-screen TV right now” fund.

Rather, this is money you’d use to fix your car (say $1,000), pay for your dog’s GDV surgery (could be $3,000), or replace your A/C maybe ($2,000 – 4,000).

Unfortunately, as you’ve likely heard or read a million times, the facts are grim:

• Almost 30% of Americans have no emergency savings, according to a survey from Bankrate (2019 Financial Security Index).
• 25% of Americans have some emergency savings… but it’s not enough to cover 3 months’ worth of expenses.
• Only about 40% of Americans could cover a $1,000 emergency expense (Bankrate, 2019).
• Most Americans are one paycheck or two away from being broke… and sadly that includes many of our colleagues, team members and clients.

So what can you do to avoid being part of these sad stats?

Let’s discuss 3 types of emergency funds: the starter emergency fund, the personal emergency fund, and the practice emergency fund.

1. The starter emergency fund

A starter emergency fund is the first step to reach when you start out in life. This is especially important if you are in debt.

Without an emergency fund, you may not have any option but to go deeper into debt…

A starter emergency fund of $1,000, $3,000 or even $5,000 will give you a financial cushion “just in case”.

Vet Financial Summit community member JA explains: “I save a percentage of each paycheck and a percent of that is allocated for emergencies and medical surprises. This then gets moved to the “emergency savings” account that cannot be touched by any card unless I authorize it online first.”

2. The personal emergency fund

Once you pay off consumer debt, you need to find a way to have a true emergency fund.

Now you can pay for larger expenses related to bigger crises: the loss of a job, replacing your car, or a disability (until disability insurance kicks in).

Vet Financial Summit community member MJ writes: “We have 6 months of expenses in our emergency fund. It is partially based on the general recommendation in financial books. My husband works in the tech industry and we’ve had to deal with layoffs in the past. So it’s better for us to have 6 months vs. 3 months.”

SJ, another community member, explains: “I also have 5-6 months saved. That includes paying the minimum payment on my loans and having to pay for the mortgage in total myself. Both my partner and I have stable jobs, but unfortunately if we lost those jobs, we would likely have to move to find more work or work outside our current areas of work as we are both in very specialized fields.”

The idea is that if you lose your income, for any reason, or you face a true crisis, you need to be able to handle the financial burden without going into debt.

This includes your rent or your mortgage, putting food on the table, paying for utilities, and paying all of your vital bills.

Most financial gurus recommend having 3 to 6 months’ worth of expenses saved up.

So if your expenses are $5,000 per month, that would mean saving $15,000 to $30,000 just for emergencies.

If you have a family and your expenses are $10,000 per month, that would mean saving $30,000 to $60,000 just for emergencies!

Is there a more scientific way to refine the amount you need to save? Of course there is!

There are (at least) 5 important factors to consider:

1. Are you single or married? If you’re married, you logically have higher bills to pay each month. Let’s say one partner loses their job. The spouse who is working will need to be able to pay for the couple’s expenses, possibly for several months.

2. How much do you spend each month? Go through the exercise of calculating how much you spend each month. Do the math over the last 2 to 3 months. Add up invoices, credit card and bank statements, receipts, cash expenses etc.

Be sure to include housing (rent or mortgage, utilities, HOA fees, property taxes, lawn care and insurance), car payments (including repairs, gas and repairs), taxes, medical expenses, insurance and living expenses (groceries).

Then take the average of the monthly total. That’s your monthly spend.

3. How quickly could you find a new job if you lost yours? How safe is your position? How about your significant other?

4. What could you sell if you were in deep financial trouble? Can you sell an asset (a car, baseball cards or your kayak)? Can you easily sell an investment?

5. In a pinch, how can you decrease your expenses? Would you cancel subscriptions? Will you stop going out?

Another way to figure out how much you should save is to use an online calculator.

Here are two suggestions:

https://www.practicalmoneyskills.com/resources/financial_calculators/family_and_life/emergency_fund

and a simpler version:

https://www.nerdwallet.com/blog/banking/emergency-fund-calculator/

It’s OK to start small, i.e. with a starter emergency fund. Pick a reasonable goal. Then automate your savings so that money is transferred automatically from your checking account into your emergency fund each month. The toughest decision is to actually start and set it up.

Last but not least, an emergency fund is not a static concept. It changes as life evolves. Be sure to change the total number if you are expecting or if you adopt a new pet.

3. The practice emergency fund

Much less commonly discussed, a business also needs an emergency fund, or cash reserves. What if a terrible crisis happened (say, a pandemic!)? Or a terrible accident happens to one of the vets? Or half the team revolts and leaves? Or the practice needs a new expensive piece of equipment? Or you get in a PR pickle that causes you to lose half of your clientele?

How would the practice survive without getting into debt?

How would you pay the rent or the mortgage?

How would you make payroll?

How would you pay suppliers?

After all, the concept is very similar to a personal emergency fund.

Vet Financial Summit community member LA writes: “This is very dependent on the size of the business and many other factors. Payroll for emergency clinics makes up on average 50 to 55% of revenue. For me it’s $100,000 a month and growing.”

This is a very serious commitment.

Bottom line: whether on the personal side or the practice side, you need an emergency fund to sleep well at night. You need to know that even if a crisis affects you, it will not lead to bankruptcy. It takes dedication and sacrifice to get there, but once you do, the relief, the inner peace, the freedom you will feel are simply priceless.

Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit

Are you ready to conquer your financial future? Be sure to join us in September for the VFS Virtual Conference. At the conclusion of the event, not only will you have a better understanding of your financial future, you will also have created your financial plan, and become part of a Community of like-minded Veterinarians supporting one another throughout the year.