Is Your Emergency Fund Too Big? – Calculate Your Monthly Living Expenses the Right Way

​The common financial rule of thumb says that you should have 3 to 6 months of living expenses in your emergency fund. But what does “living expenses” actually mean? To calculate your monthly living expenses, you need to combine the amount needed to maintain your household’s physical and mental well being along with your other monthly required payments. Surprisingly, it is possible for your monthly living expenses to be quite a bit less than your normal monthly spending. Read the full article below to find out your monthly living expenses and be surprised at how reasonable they can be relative to your income. 


Your monthly living expenses are a small portion of your monthly income and will most likely be less than your current monthly expenses due to your ability to cut down on extras and luxuries.


​The common financial rule of thumb is to have 3 to 6 months of living expenses. Although this might not be right for everyone, it is generally a good rule of thumb because it balances the costs of having a significant portion of your wealth in cash (and possibly earning so little that inflation is eating away at it) with the benefits of having a cushion of liquid funds available should a financial storm strike. Inquisitive minds will follow with the following question: What do you mean by “living expenses?” This is an excellent question because the rule of thumb states that we need to look at living expenses as opposed to income.

​Living Expenses ≠ Income

​Living expenses are not income but instead, mean the total amount of money needed to provide for the needs (as opposed to wants) of you and your household, maintain financial security, and keep you out of financial default. In a financially healthy situation, living expenses should be substantially less than your pre-tax income and less than your post-tax income by a significant amount.

Note: If you find yourself in an unsustainable situation where your monthly living expenses exceed your monthly income, you are headed for a financial catastrophe (unless you’re expecting some sort of windfall), and you should immediately attempt to remedy the situation.

​How to Calculate Your Monthly Living Expenses

First, Cover Basic Necessities 

To get at your monthly living expenses number, we will first focus on the expenses required to maintain the immediate life, health, physical, and mental well-being of your household:

Food: This is the amount you will need to spend in a month to feed your household with nutritious but inexpensive meals. This does not include gourmet items, going out to dinner, or alcohol. Focus on cutting down on luxurious or superfluous items and purchase nutritious staples and necessities. If you are a typical US household, for example, it might be possible to get by relatively easily for a few months on as little as half of your normal (non-emergency) monthly food budget.

Drinking Water: This should include the amount spent on quality but generic water for your household. If you have a water filter at home, your drinking water expense could be minimal. If you purchase bottled water, it is wise to transition to generic brands instead of name brands during your financial emergency (or during the time you’re replenishing your emergency fund after a financial emergency). Buy in relative bulk and bottle your own water in order to cut down on costs. As with food expenses, it is possible for a US household that buys premium bottled drinking water to cut their drinking water expense by as much as fifty percent.

Shelter: This is a less-flexible expense because you can’t get out of your apartment or house quickly (and most likely wouldn’t want to for a short-term financial emergency). If your emergency is of an unusual nature or if you don’t have a permanent place to live, you will want to provide shelter for yourself in other ways (eg. crash on a friend’s couch for a short period of time, stay with parents or other family members, rent a hotel room, etc.). You want to make sure you have enough money to maintain your shelter during the financial emergency, although this likely won’t be a big problem because maintenance is usually a relatively infrequent expense.

Heating and Cooling: You’ll want to make sure you maintain your home at a livable temperature, but it might be wise to buckle down in a financial emergency and put up with a bit more physical discomfort than you would in normal times. Too hot? Open a window and drink a cool glass of water. Too cold? Put on a sweater.

Medical Care and Medication: Don’t skimp on required medicines and medical care but see if it is possible to transition to generic brands if you are in a financial emergency. This includes required medications, regular checkups, and emergency and urgent care visits. This also includes pressing mental health needs. If you need to see a therapist or mental health professional to maintain your mental and emotional well-being, make sure to account for this. A financial emergency isn’t a great time to forsake necessary or beneficial mental health care or counseling.

Other Necessities: Other necessities will include toiletries, paper towels, required clothing replacement, gas for your car to get to work and school, car maintenance, etc. These expenses should be looked at with a disciplined and prudent eye so as not to purchase superfluous items. During a short-term financial emergency, a significantly smaller amount of money can be allocated to these items with relatively little discomfort.

Next, Stay Current on Your Payments

After we have taken care of the basic necessities, we will need to tabulate your required monthly payments in order to properly calculate your monthly living expenses. You want to stay out of financial default and maintain any sort of insurance you have in place even in a financial emergency, so it is important to account for the following:

Credit Card Payments: You can include your minimum estimated monthly payments here, but the more you include, the better given the relatively high interest rates on most credit cards

Student Loan Payments: Include your required student loan payments

Insurance: Include the amounts needed to maintain your health, car, homeowners, life, umbrella, long-term care, and long-term disability insurance policies as well as any other insurance policies you may have in place

Car Payments: Include your car and lease payments

Other Payments: Other payments might include a child’s tuition to school or college, child support payments, spousal support payments, or payments from a court case that you lost. ​

Remember That Each Situation Is Unique

Remember that this is a very general guide meant to be used by a variety of people. Your situation is unique, and it is possible that your monthly expenses may be different by a little or a lot from what we discuss here. Things such as the number of dependents, unique family situations, unique jobs and businesses, unique medical or mental health needs, or unique lifestyles might cause your situation to be different from the typical scenarios discussed here.

What Did We Learn?

If you’re a true financial nerd, you can put numbers to each of the above items and calculate the current projected monthly living expenses for your household (it’s only going to be a projection because things are random in this world, and things can change at any moment). If you’re not yet a hardcore financial nerd, it might be enough to just glance over the items and roughly estimate the amount needed in your mind (provided you understand that this will be a less accurate estimation of your monthly living expenses). Either way, you will likely come to the conclusion that your true monthly living expenses, as needed to calculate the size of your emergency fund are less than what you currently spend on a monthly basis. This is generally true fro the following two reasons:

  1. Many of the things you spend your money on currently are wants and not needs – they are luxury items or can be considered extras. These things can be cut down or totally eliminated should a financial emergency arise. They make life better and more enjoyable, but they aren’t required.
  2. On the actual necessities (eg. food and water), you can cut down by purchasing cheaper alternatives (as long as you make sure they are of acceptable quality). Instead of buying Evian or Smart Water, you can buy generic store-brand water. Better yet, you can bottle your own water at home. You can eliminate restaurants entirely and start cooking at home. If you’re a typical household, there should be room in your life to cut down for a while during a financial emergency.

Although your monthly living expenses don’t have to be the size of your actual monthly expenses, it is wise to remember that a conservative approach will lead to a more robust emergency fund and a more resilient financial situation for you. Err on the side of caution, and don’t be overly aggressive in estimating how much you can cut down during a financial emergency.

I know it’s not fun reading the above – no one wants to cut out their premium bottled waters, their dinners out, movies, app and music purchases, premium soaps and shampoos, or anything else they enjoy doing. If you’re in a financial emergency, however, it is wise to buckle down for a bit until you get back on your feet. Discipline and short-term self-denial can be excellent tools for quickly recovering from a financial emergency minimally scathed. The knowledge that you can buckle down and survive with a diminished lifestyle for a short period of time is useful in figuring out how much money you’ll need in your emergency fund.

In conclusion, you don’t need to use your monthly income when calculating your emergency fund – your monthly living expenses are likely to be significantly less than your income. Additionally, you can cut out extras and luxuries and only focus on the necessities described above when calculating your monthly living expenses. This will allow you to get a better and more accurate picture of how much you need to have in your emergency fund, and you’ll see that you can fill up your emergency fund much more quickly because of this. However, remember not to be overly optimistic about how much you can really live on – be realistic with a conservative outlook, and you should be fine.

Any required expenses that were missed? Please let us know in the comments below, and we’ll update the article with your valuable feedback. 

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