Latest / The Emergency Fund Podcast with Fexingo: Cash Reserves, Saving, and Financial Cushion / Should Your Emergency Fund Be Tied to Your Income
Transcript
- Lucas: Let me start with a number. The median emergency fund target in the US personal finance advice industry is three to six months of expenses. But if you actually look at how people spend — especially people who don't have a steady biweekly paycheck — that blanket advice can be off by a factor of two. Luna: You're talking about freelancers, gig workers, anyone with variable income. Lucas: Exactly. And I think the rule of thumb is useful as a conversation starter, but it can lull someone into thinking they're covered when they're not. Or the opposite — it can make someone feel like they're falling short when they're actually fine. Luna: Right. So what's a better way to think about it? A formula that accounts for income variability? Lucas: There's a framework I've seen a few financial planners use. It's based on something called the 'income stability factor.' You take your baseline expenses — the fixed stuff you can't easily cut, like rent, utilities, minimum debt payments, food — and then you multiply by a risk factor tied to how predictable your income is. Luna: So someone with a stable government job might have a lower multiplier than a real estate agent on pure commission. Lucas: Exactly. For someone with a salaried position that's been stable for years, maybe the multiplier is one — meaning three months of expenses is genuinely enough. But for someone whose income fluctuates month to month by, say, 30 to 40 percent, you might want a multiplier of two or even three. That puts your target at six to nine months, sometimes more. Luna: And this isn't just about the amount — it's also about the composition. If your income is lumpy, you might need more cash on hand because you can't predict when the next payment arrives. Lucas: Right. And there's another layer: expense volatility. Someone with a stable job but variable expenses — maybe a small business owner with irregular tax payments, or a parent with unpredictable childcare costs — also needs a bigger cushion. The point is, the one-size-fits-all number doesn't fit most people. Luna: Do you have an example of someone for whom the standard advice would be misleading? Lucas: Sure. Take a freelance graphic designer I know. She earns about $80,000 a year on average, but her monthly income ranges from $4,000 to $10,000. Her fixed expenses are around $3,500. The standard advice would say she needs $10,500 to $21,000 in her emergency fund. But if she hits a dry spell — say, two months with only $3,000 in income each — she'd burn through that lower end fast. She really needs closer to $25,000 to feel safe. Luna: That's almost double the upper end of the common range. And she's not an outlier — a lot of creative professionals have that pattern. Lucas: Exactly. Meanwhile, a friend of mine is a tenured professor with a $90,000 salary. His expenses are $4,000 a month. For him, even two months of expenses feels like overkill because his income is so predictable. He keeps about $8,000 in his emergency fund and invests the rest. Luna: So it's really about matching the fund to your specific risk profile, not just following a generic rule. Lucas: Right. And to make it even more concrete, there's a concept called the 'minimum viable emergency fund.' It's the amount you need to cover your absolute essentials — not your lifestyle, but your survival — for the period it would take you to find a new income source. For a freelancer, that might be longer than for someone with a stable job, because it takes time to rebuild a client base. Luna: So how do you calculate your own minimum viable fund? Walk me through the steps. Lucas: Step one: list your fixed essential expenses — rent or mortgage, utilities, insurance, minimum loan payments, groceries, transportation. Step two: estimate your income stability. If you've had the same job for five years, your risk is low. If you're a freelancer, look at your worst three months of income over the past two years. Step three: multiply your essential expenses by the number of months you'd need to survive a worst-case scenario. For a stable employee, that might be three. For a freelancer, six to nine. Luna: And you'd adjust that number based on how easy it is to cut expenses. If you can slash your spending by 30 percent in a pinch, your fund can be smaller. Lucas: Yes. And that's actually a good exercise — before you hit a crisis, figure out what your 'lean budget' looks like. That way, you know exactly how long your fund will last if you tighten the belt. Luna: Okay, but what about someone whose income varies not just month to month, but year to year? Like a real estate agent who makes $150,000 one year and $80,000 the next? Lucas: That's a tougher case. For someone with high-year-to-low-year variability, you might want to base your emergency fund on the lean year's expenses. Or even build in a buffer based on the difference between your average income and your minimum income over the past three years. That starts to look less like an emergency fund and more like an income-smoothing account. Luna: And that's a different psychological framing, too. It's not just for emergencies — it's to make your financial life feel less volatile day to day. Lucas: Exactly. And speaking of that, there's one more piece I want to mention. A lot of people with variable income end up using credit cards as a buffer — they put expenses on plastic during a low month and pay it off when a big check comes in. That can work, but it's risky because it assumes the next check arrives on time and in full. Luna: And it adds interest costs if you can't pay the full balance. Plus, it can mess with your credit utilization ratio. Luna: That's a good point. Incremental progress is still progress. Lucas: And here's a quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes possible. We don't run ads, so listener support is what keeps this conversation going. If you've gotten value from thinking through your own numbers, that's the reason we keep doing it. Luna: Yeah, it really does help us stay independent and focused on what's useful for you. And we appreciate every bit of support. Lucas: So back to the topic — let's talk about one more nuance. What if you have a partner or a spouse? Then your emergency fund calculation should account for two incomes and two sets of risks. Luna: Right. If one partner has a stable job and the other is a freelancer, the combined risk is lower than two freelancers. But you still need to plan for the worst-case scenario where both incomes drop simultaneously. Lucas: Exactly. And that's where the income stability factor becomes a joint calculation. You'd look at the combined monthly essentials and the combined worst-case income scenario. If both incomes are unpredictable, you might need a fund that covers six to nine months of joint expenses. Luna: So the bottom line is: don't just grab the standard advice off the shelf. Do the math for your own situation. Lucas: Right. And revisit it once a year, or whenever your income or expenses change significantly. Because the number that made sense when you were single and salaried may not work when you're freelancing with a family. Luna: I think that's a great place to leave it. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. We'll be back tomorrow with another episode.