By Silvia R. Link 
Once you’ve built your emergency fund, it’s essential to maintain it over time and adjust it as your financial situation evolves. Life changes, such as a new job, a move, or changes in your family situation, may require you to reassess your financial needs. The key is to ensure that your emergency fund continues to provide sufficient coverage while growing as necessary to support your changing circumstances.
In this chapter, we’ll discuss how to maintain and adjust your emergency fund based on your personal and financial milestones.
1. Periodically Review Your Emergency Fund Amount
Your emergency fund should be a dynamic part of your financial plan that adapts as your life circumstances change. Here are some key reasons you may need to adjust your fund:
- Changes in Living Expenses: As your life changes, so do your expenses. A move to a more expensive city, getting married, or having children can all increase your cost of living. Conversely, a change like paying off a large debt or downsizing your living situation might reduce your expenses.
- Income Changes: If you get a raise, a promotion, or a new job with a higher salary, you may need to adjust your emergency fund to reflect your new income level. A larger income typically leads to higher living expenses, and therefore, a higher emergency fund should be considered.
- Health or Family Changes: Significant changes such as starting a family, caring for a dependent relative, or experiencing health issues may change your financial needs. Your emergency fund should be reassessed to reflect any additional costs related to healthcare, childcare, or other factors that increase your financial demands.
To keep your emergency fund aligned with your current lifestyle, perform an annual (or semi-annual) review of your expenses and financial situation. Adjust the fund as needed to ensure that it covers three to six months of living expenses.
2. Increase Your Emergency Fund with Income Growth
When your income grows, so should your emergency fund. This ensures that you continue to have adequate financial protection should unexpected circumstances arise. The general rule is that as your income increases, you should save a higher amount to maintain the right balance between security and financial growth.
For example, if you get a salary increase of 10%, increase your emergency fund by a proportional amount. If your living expenses increase as a result of your new income level (for example, due to buying a home or moving to a more expensive area), increase your emergency fund by the amount required to cover those additional expenses.
- Example: If your expenses go from $3,000 to $3,500 per month with a salary increase, your emergency fund should be raised from $9,000–$18,000 to $10,500–$21,000 (for three to six months of expenses).
You don’t need to make drastic changes all at once, but gradually increasing your emergency fund as your income increases will ensure that your financial protection remains strong.
3. Adjust for Major Life Events
Life events often come with financial adjustments that require a recalibration of your emergency fund. Here’s how to handle some of the most common life events that might necessitate changes to your emergency fund:
- Marriage or Partnership: When you get married or move in with a partner, your expenses and financial responsibilities may increase or decrease. You may need to adjust your emergency fund based on combined income, shared expenses, and any changes in health insurance or other benefits.
- Starting a Family: Having children introduces new financial responsibilities, including medical expenses, daycare, and other childcare costs. As your family grows, your emergency fund should increase to cover the additional costs of living and emergencies.
- Homeownership: If you buy a home, your expenses will likely increase. In addition to your mortgage, you may have new costs such as property taxes, maintenance, or utilities. These can be unpredictable and may increase your need for a larger emergency fund.
- Health Issues: If you or a family member faces a health crisis, your financial needs may change. Medical bills, lost income due to time off work, and other expenses related to recovery can quickly add up. You may need to increase your emergency fund to cover unexpected medical costs.
Each of these life events presents unique financial challenges, and your emergency fund should reflect those changes. Be proactive in adjusting your savings to accommodate new financial responsibilities.
4. Account for Inflation and Rising Costs
Over time, inflation can erode the purchasing power of your savings, including your emergency fund. Prices for everyday goods and services tend to rise over the years, which means the amount of money needed to cover your living expenses will also increase.
To keep up with inflation, review your emergency fund periodically and adjust the amount you are saving to match the increased cost of living. For example, if inflation causes your monthly living expenses to rise by 3% each year, increase your emergency fund by a corresponding amount.
- Example: If your monthly expenses are $3,000 and inflation rises by 3%, your new monthly expenses would be $3,090. Over the course of a year, this would add an additional $1,080 to your emergency fund to maintain the same coverage.
Adjusting for inflation is an ongoing process and will ensure that your emergency fund keeps pace with rising costs, maintaining its effectiveness over time.
5. Reducing the Fund After Paying Off Debt or Major Expenses
As you achieve financial milestones, such as paying off a large loan or making a significant purchase (e.g., a car or home), you might find that your expenses decrease. If this is the case, you may be able to reduce the amount of your emergency fund.
However, even if you’re paying off debt or lowering monthly expenses, it’s important not to reduce your emergency fund too drastically. Financial emergencies can still arise unexpectedly, and having a smaller but sufficient emergency fund can provide you with peace of mind and financial security.
For example, if you were paying off student loans and now have more disposable income, consider reallocating some of the money you were using to pay down debt into your emergency fund. However, do not eliminate the fund entirely, even if your expenses decrease. Having at least three months’ worth of living expenses is still a good goal for most individuals.
6. How to Handle Emergency Fund Shortages
Sometimes, despite careful planning, you may find that your emergency fund falls short. This can happen due to unexpected expenses, loss of income, or other financial challenges.
If you find yourself in this situation, take the following steps:
- Assess the Situation: Determine the cause of the shortfall. Are your expenses higher than expected? Have you experienced a sudden loss of income? Understanding the cause will help you make a plan to rebuild your emergency fund.
- Increase Savings: Allocate more money toward your emergency fund over the next few months. Consider cutting back on discretionary expenses or finding additional income sources to contribute to your savings.
- Reevaluate Your Fund Size: If you’re finding it difficult to build up your emergency fund to three to six months’ worth of expenses, consider temporarily reducing the goal to a smaller amount. Having some emergency savings is better than none, so adjust the target to reflect your immediate needs.
- Avoid Using the Fund: Resist the urge to dip into your emergency fund for non-emergency expenses. Using it for unnecessary purchases will only delay your progress and put you at risk if an actual emergency arises.
Conclusion
Maintaining and adjusting your emergency fund is an ongoing process that should reflect changes in your life, expenses, and income. By reviewing your emergency fund regularly, increasing it as necessary, and adjusting for life events and inflation, you can ensure that your financial safety net is always ready to catch you when life throws a curveball.
In the next chapter, we’ll discuss how to recover from financial setbacks and rebuild your emergency fund after it’s been used, so you can remain financially secure through challenging times.