Given the following personal balance sheet and personal income statement:

$4,638 Emergency Fund
$7,391 Total Liquid Assets
$47,829 Total Household Assets
$7,953 Superannuation (Restricted Assets)
[$7,953+10,000] Total Investment Assets (including superannuation)
$7,998 Total Current Liabilities
$46,153 Total Long-Term Liabilities
$70,291 Disposable Income
$51,594 Total Expenses

Calculate the Emergency Fund Coverage (in months).

Please write the answer in two decimal places.

Note: Total Investment Assets (including superannuation) could be written in brackets. For example, Total Investment Assets (including superannuation) is [5,000+10,000], which is 15,000.

Question

Given the following personal balance sheet and personal income statement:

$4,638	Emergency Fund
$7,391	Total Liquid Assets
$47,829	Total Household Assets
$7,953	Superannuation (Restricted Assets)
[$7,953+10,000]	Total Investment Assets (including superannuation)
$7,998	Total Current Liabilities
$46,153	Total Long-Term Liabilities
$70,291	Disposable Income
$51,594	Total Expenses

Calculate the Emergency Fund Coverage (in months).

Please write the answer in two decimal places.

Note: Total Investment Assets (including superannuation) could be written in brackets. For example, Total Investment Assets (including superannuation) is [5,000+10,000], which is 15,000.

BlackTom AI · Accepted Answer

Emergency fund coverage is measured as the Emergency Fund divided by monthly living expenses (how many months of typical expenses the emergency fund will pay).

Relevant data and concepts:
- Emergency Fund (annual figure given as a lump amount to cover expenses): 4,638
- Total Expenses (annual): 51,594
- Convert annual expenses to monthly expenses by dividing by 12
- Emergency Fund Coverage (months) = Emergency Fund / (Monthly Expenses)

Step-by-step calculation:
1. Compute monthly expenses:
   Monthly Expenses = Total Expenses / 12
   Monthly Expenses = 51,594 / 12
   Monthly Expenses = 4,299.50

2. Divide the Emergency Fund by monthly expenses to get coverage in months:
   Emergency Fund Coverage = Emergency Fund / Monthly Expenses
   Emergency Fund Coverage = 4,638 / 4,299.50

3. Perform the division:
   4,638 ÷ 4,299.50 = 1.078709... ≈ 1.08 (rounded to two decimal places)

Why this formula is appropriate:
- The emergency fund is intended to cover normal living expenses if income stops; therefore comparing it to monthly expenses (not to income or to investment assets) directly measures how long the fund will sustain those expenses.
- Using disposable income minus expenses (the surplus) would measure how many months of current surplus the fund represents, yielding a different and less relevant figure (4,638 * 12 / (70,291 − 51,594) ≈ 2.98 months). Using total liquid assets or including superannuation would overstate emergency coverage because retirement/restricted assets and non-emergency investments are not intended for short-term living costs.

Other possible interpretations are incorrect because they compare the emergency fund to the wrong denominator (surplus, annual figures without converting to monthly, or including restricted assets).

Conclusion: Emergency Fund Coverage = 1.08 months, which matches the provided correct answer.

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