When it comes to personal finance, fewer things are more important than having an emergency fund that is large enough to carry you through the unexpected twists and turns that life throws your way.
Whether you need a new set of tires after driving through a construction site, your dog needed an unexpected trip to the vet after getting into your chocolate stash, or you finally gave in and agreed to that root canal, having an adequately-funded emergency fund will put your mind at ease and help you survive without needing to rely on expensive credit cards or personal loans, which will only leave you worse off than when you started.
Not sure how much you should be saving? Download our free Emergency Fund Calculator!
You know you need an emergency fund. The question is: How much money do you really need in your emergency fund? What is the perfect emergency fund amount? How much is too little, and how much is too much?
Below, we offer advice to help you figure out exactly how much you should be saving to make sure you survive any emergencies that pop up along the way.
Figuring out how much you need
At its most basic, an emergency fund should be able to pay for any of the large, unexpected expenses that we all eventually face in life. Though it’s impossible to know exactly how much any given expense might set you back, at a bare minimum, you should aim to have between $1,000 and $2,000 set aside specifically for emergencies. This should be enough to cover most of the everyday emergencies that you’re likely to face.
Ideally, though, your emergency fund should be large enough to cover your essential living expenses for a set amount of time if you ever find yourself out of work. This way, if you get sick and can’t work or you lose your job and run out of unemployment benefits, you have your emergency fund to fall back on.
To figure out exactly how much money you should have in your emergency fund, you’ll need to know two things:
- How much money do you spend each month on essential living expenses?
- How many months’ worth of these expenses does your fund need to cover?
What expenses should be included in your emergency fund?
To put it simply: Only the essentials.
Your emergency fund is designed to cover your essential expenses when you have no other source of income. This means that you should account for any regular, non-negotiable monthly expense that you need to pay in order to live your life. Usually, this would include things like your:
- Mortgage or rent payment
- Homeowner’s or renter’s insurance
- Property tax payment (home and car)
- Utilities (electricity, water, gas/oil, internet, phone)
- Debt payments (car loan, student loans, credit cards)
- Insurance (health, life, car, disability)
- Transportation costs (gasoline, bus pass, subway)
- Childcare costs (daycare, preschool, private school tuition)
What don’t you need to budget for in your emergency fund? Any non-essential monthly expense that you would likely cut out of your budget if you lost your job or faced a different major emergency that impacted your finances. This might include things like:
- Entertainment (movies, theatre, video games, bowling, etc.)
- Dining out (restaurants and bars)
- Savings (retirement, home downpayment, college savings, etc.)
- Nonessentials (clothing, home goods, vacations)
If you don’t know what your essential monthly expenses are, your first step is to sit down and figure that out. Simply list out the expense name and the amount you spend on it each month, and then add all of those amounts together to find your monthly budget. (Our free emergency fund calculator makes it easy to gather all of this information in one place without forgetting anything.)
If you aren’t the kind of person who regularly tracks your spending, you might be shocked at just how much you are spending each month. Who knew life was so expensive? If you think that you’re overpaying for anything, now would be the perfect time for you to negotiate a better deal or find other ways to cut back on your expenses: Adjusting your expenses now means that your emergency fund will be able to go even further.
How long does your emergency fund need to last?
Most financial experts recommend that your emergency fund should have enough money to cover 3 to 6 months’ worth of your essential living expenses.
While that is a good rule of thumb—having that much set aside will likely cover most major emergencies that come your way, including prolonged job loss—the truth is a little more complicated. Exactly how long your emergency fund should last will depend largely on your own personal financial situation. Though three months’ worth of expenses might be fine for some people, others might want their emergency fund to pay for as an entire year’s worth of expenses.
Because everyone’s financial situation and risk tolerance is different, it is impossible for me to give you hard and fast rules to follow when it comes to exactly how many months your emergency fund should account for. That being said, below are some guidelines that you can use to determine how much is enough for you.
If you work in a stable industry, at a stable company, and can easily find a comparable job in the event you lose your job: You will likely be fine with 3 months’ expenses minimum.
If you are part of a two-income household and your spending is reasonable: You will likely be fine with 3 months’ expenses minimum.
If you work in an industry or company that is going through some changes, but could realistically find a comparable job elsewhere in the event you lose your job: You will likely be fine with 6 months’ expenses minimum.
If you work in a volatile industry or company where layoffs are prevalent, and it might be difficult to find a comparable job elsewhere in the event you lose your job: You will likely be fine with 9 to 12 months expenses.
If you are self-employed, cash flow is irregular or seasonal, or you work in a niche industry or career (making it difficult to find a new job in the event you lose your job): You will likely be fine with 12 months’ expenses minimum.
If you plan to start a new business: You should aim for 12 months’ expenses minimum, though depending on your industry it may be wise to save even more.
If you are close to retirement: You should aim for 12 months’ expenses at a minimum, so that you can ride out any unexpected dips in the market and avoid losing money by cashing out your investments during a recession.
Other considerations that might warrant saving more money include: Having high levels of variable debt, having a low tolerance for risk, and/or you or a family member having a chronic illness, or you work in a commission-based sales role.
So, how much should you have in your emergency fund?
Now that you know how much money you spend each month on essential living expenses, and you know how many months’ worth of expenses your fund should cover, figuring out an exact number is just a matter of multiplication.
(Monthly Budget) x (Number of Months) = Emergency Fund
If you don’t feel like doing math, you want to see exactly how much of your fund is dedicated to each expense, or you need some help planning exactly how you plan to start building your fund, you should check out our free emergency fund calculator.
How to get started building your emergency fund
Depending on how much money you spend each month on expenses, and how many months your fund needs to last you, building your emergency fund might seem like a daunting goal.
The most important thing to remember is that having anything set aside for emergencies is better than having nothing set aside.
Start by choosing a beginning goal: For example, saving $500. Once you hit that goal, choose a higher amount—maybe $1,000. After that, aim for 1 month’s worth of expenses. Then 3 months’. Then 6, and 9, and 12 (depending on your goal).
Also, remember that small amounts really do add up over time. If you save just $25 each week, you’ll have $1,300 after one year, $6,500 after five years, and $13,000 after ten years—not including the added boost that interest will give you!
And perhaps most importantly: Make sure you know where to keep your emergency fund. It should be separate from your regular checking and savings accounts, easily accessible in the event of an emergency, and it should never be invested, or you risk not having it when you truly need it. A high-yield savings account, money market account, or a CD ladder will probably be your best bets.