Do you know how big your Emergency Fund should be? You guessed it right: the size of 3+ months worth of your expenses. Or the equivalent of the unemployment rate (say, 8% unemployment means that you should have enough dough to last for 8 months) - however you look at it. But have you ever wondered: what’s the maximum allowed size of your Emergency Fund? The correct answer is 9-10 months worth of your expenses (excluding savings for financial goals). If you’re truly committed - saving even more might be a good idea, but it might as well be harmful.

Before we proceed with explanations, can you answer a simple question? How can an average Joe save up money enough for him to last for, say, 6 months? What kind of motivation drives his determination to save money rather than buy the latest plazma TV or an iPhone or a new car? Buying clothes when needed rather than a new Macy’s (David Jones, etc) catalog arrives in the mail? Staying home for holiday rather than going to Mexico/Hawaii/Fiji/you name it?

The keyword is “FEAR“. Fear of losing a job and inability to find a new one. Fear of not having enough money to pay for an emergency (from a car breakdown to an emergency hospital visit), fear of foreclosure of a recently purchased family house. Meet the economics of fear - something convincing you to spend money on various products, starting with common financial products like mortgage repayment protection to a gun in the pocket to protect you from criminals. However, the savings aspect of the economics of fear is a bit more tricky since it doesn’t force you to buy anything (except, probably for life insurance and income protection which, in my opinion, is a must-have), but does require certain changes in life priorities and expense structure.

We, Weekly Envelope users, are not fanatical supporters of the ’save yourself rich’ idea and strongly believe that scrupulous expense tracking harms you more than cures. Looks like it’s time for a piece of advice:

if you save more than necessary for a ‘rainy day’ - it has already occurred to you.

Take our word: your Emergency Fund is not the only type of financial goal you can have. There’s a huge chance that you need to save for a new car/home renovation/college for kids/your own retirement. Move the excess money to any of your financial goals. If you’ve already got everything arranged (our congratulations to you!) - give yourself a break and go on holiday somewhere or spend money on yourself by other means (ex: resort to retail therapy). Or donate the excess money to charity or to your church.

And don’t forget to tell your friends and family about the Weekly Envelope family budgeting service, which helps you without sending you on a guilt trip.