How much emergency fund should I have?

If a large, unexpected expense comes along, are you prepared to pay for it without going into debt or derailing your saving plans? If not, consider building an emergency fund: a cache of money saved up to be used only in case of true financial emergencies. Most experts recommend keeping three to six months’ worth of living expenses in your fund. This financial cushion ensures that unexpected events like job loss, medical crises, or car repairs don’t undermine your financial stability. An emergency fund gives you peace of mind and ensures that life’s inevitable curveballs don’t throw your financial plans off course. 

Here’s what we’ll cover:

• The benefits of having an emergency fund
• Calculating how much emergency fund you should have
• Tips for building your emergency fund
• Where to keep your emergency fund
• Common mistakes to avoid

The benefits of an emergency fund

Unforeseen expenses can put a strain on your budget now, as well as undermine your longer-term financial goals. Having a safety net helps you avoid dipping into your other savings or going into debt.

Keeping your budget and savings on track

If your car breaks down, your furnace goes out, or you take a trip to the hospital, you’ll likely be faced with a large, unanticipated bill. When you have an emergency fund, unexpected expenses are less likely to put you in a pinch. Instead of tightening your belt for the month or taking money from your other savings goals, you can dip into your emergency fund to cover the expense.

Preventing debt accumulation

If you don’t have enough money in your checking or savings account to cover large, sudden expenses, you might find yourself turning to high-interest loans or going into credit card debt. Over time, the interest on that debt can eat away at your budget and prevent you from saving and investing for long-term goals. By building an emergency fund, you can have the money to cover a crisis without taking on the burden of debt.

Peace of mind

Having a financial safety net reduces the stress of wondering if you’ll be able to pay your bills if you hit a financial setback. This can be especially helpful in easing concerns about the job market. By keeping three to six months of living expenses in your emergency savings account, you can rest assured that you’ll be able to pay for your basic necessities if you’re laid off. 

Calculate your emergency fund savings goal in 5 steps

While the answer to “How much emergency fund should I have?” is generally three to six months’ worth of living expenses, you’ll want to get a more precise number to determine your personal savings goal. Once you have that number, you can build emergency savings into your monthly budget. 

Step 1. Calculate your essential monthly expenses

Make a list of all your truly necessary monthly expenses, such as your rent/mortgage, utilities, groceries, transportation, pet care, childcare, insurance, debt payments, etc. Your list should include all the must-haves that you can’t go without. You might not want to include discretionary expenses like entertainment or dining out, as you may decide to cut back on those things in a financial crisis. Add up the cost of all your essential monthly expenses. 

Step 2. Decide how many months of expenses you need in savings

Your emergency fund is there to cover large unplanned expenses as well as to float you if you lose your income. Finding a new job can take time, so decide how long you might need to use your emergency savings after a layoff. For instance, if you have a stable job, saving three months’ worth of expenses might suffice. However, if your income is irregular or your industry is unstable, consider saving six months’ worth or more.

Step 3. Multiply your monthly expenses by the number of months

Take the total cost of the essential monthly expenses you calculated in step one and multiply it by the number of months you decided on in step two. This will tell you how much you should have in your emergency fund to cover all your living expenses for the amount of time you’ve decided you might need. For example:

• If your monthly expenses are $2,000 and you want enough to cover three months’ of expenses, you might aim for $6,000 in your emergency fund (2,000 x 3).
• If your household’s monthly expenses are $5,000 and you want a buffer to cover six months, your target emergency savings would be $30,000 (5,000 x 6).

Step 4: Consider your personal circumstances 

Having three to six months of living expenses in your emergency fund is a general rule of thumb, but you might want to shoot for more depending on your personal circumstances. When you calculate how much you should have in your emergency fund, consider the following factors. 

Employment status

Consider your job security and industry stability when determining the size of your emergency fund. If you’re in a volatile industry or have an irregular income, you might want a larger emergency fund to cushion against potential income disruptions. If your primary income is from freelance or seasonal work, it’s particularly important to ensure you can get by during slower periods.

Family size and dependents 

Having dependents significantly increases your financial responsibilities. Whether you have children, elderly parents, or other family members relying on you, ensure your emergency fund accounts for the needs of everyone in your household. Consider factors such as education fees, medical expenses, and daily living costs for all dependents. If you’re planning to have a child or help out an ailing family member in the near future, it may be wise to bulk up your emergency fund now so you’re prepared for the unknown.

Health conditions and insurance coverage

Accidents and illnesses are often major culprits when it comes to big unexpected expenses. Be sure you understand the details of your health insurance coverage, including your deductible, out-of-pocket maximum, and things your policy doesn’t cover. Many people pad their emergency fund with enough money to meet their out-of-pocket maximum for the year to avoid going into medical debt. And if you have a chronic health condition, you may wish to build a bigger emergency fund in case you need additional unexpected treatment. 

Step 5: Calculate your goal and start saving

An emergency fund takes time and dedication to build. By putting a bit of money into your emergency savings every month, you’ll slowly but surely increase your savings until you reach your target. 

• Take the amount you determined in step three above and add in any additional money you’d like to have in your emergency fund based on personal circumstances. This is the total amount you want to eventually save up in your emergency fund. 
• Review your budget and determine how much money you can put into your emergency savings each month. Even if it doesn’t seem like much, any amount you can afford will help move you toward your target.
• Once you reach your overall savings goal, consider whether you want to keep padding your emergency fund or put money into long-term investments instead. But remember that if you dip into your fund for an unexpected expense, you’ll want to build to back up to your original goal amount. 

Tips for building your emergency fund

Saving up enough to cover three to six months of living expenses might sound daunting, but it can be achievable. Try these tips to help you stick to your plans and boost the amount of money you put into your emergency fund. 

Start small

If your ultimate emergency savings goal feels impossible, it’s okay to scale back your expectations to start. You might want to adjust your target amount to something that feels more achievable, like the cost of a major car repair, the amount of your health insurance deductible, or just a couple months’ worth of living expenses. Once you achieve that goal, use the sense of accomplishment and momentum to inspire you to continue your savings strategy. 

Save consistently

Once you’ve budgeted for monthly emergency savings, make it an ongoing habit. Make saving easier by setting up an automatic transfer from your checking to your savings account each month so you’re not tempted to spend the money. You could also have your employer deposit a portion of your paycheck directly into your savings account so that you don’t accidentally spend money you’ve planned to save.  

Spend less to save more

If you want your emergency fund to grow faster, look for ways to save money on your monthly expenses. You might want to trim some discretionary spending, like streaming services or shopping, and put that cash toward your safety net instead. Another helpful strategy is to review all your monthly expenses to see if you’re spending more than you need to on certain things. See if your bank offers features to help you save, like rounding up purchases to the nearest dollar and putting the spare change into your emergency fund.  

Take advantage of windfalls

Life often comes with unexpected expenses, but you may also come into unexpected income. If you find yourself with an infusion of extra cash, resist the urge to splurge and use those funds to boost your emergency savings. Tax refunds, bonuses, and gifts are all opportunities to get to your emergency fund goal faster. 

Put your money to work with interest

When your money earns interest, your emergency fund grows faster. And the longer you keep money in an interest-bearing account, the more you can take advantage of the power of compounding, which is when the interest you’ve earned is added to your principal and starts earning interest as well. So don’t stuff your emergency fund under your mattress; look for saving account options that pay the best possible interest rate.  

Where to keep your emergency fund

Balancing accessibility and earning interest is key when deciding where to keep your emergency fund. You need the ability to access your emergency savings quickly when unexpected expenses arise, but will also benefit from an account that pays you interest. Each of these options has its own benefits and potential drawbacks. The best choice for you will depend on your specific needs and financial situation. 

Savings accounts

Regular savings accounts offer easy access to your funds, making them a convenient choice for emergencies. Storing your emergency fund in a savings account instead of a checking account helps you avoid accidentally dipping into your fund, and usually gives you the chance to earn interest. However, the interest rates on regular savings accounts are typically lower compared to other options. Despite the lower returns, the simplicity and immediate accessibility make savings accounts a popular choice for many people.

High-yield savings accounts

High-yield savings accounts generally pay a much higher rate than regular savings accounts. That gives you the best of both worlds: higher interest rates and easy access to your money. Keep in mind, though, that high-yield savings accounts often require a larger minimum balance than regular savings accounts, and they may come with monthly maintenance fees. Research your options carefully to ensure you’re not paying fees that eat away at your savings. 

Money market accounts

A money market account is like a hybrid of a savings and a checking account. They generally provide higher interest rates than standard savings accounts, and often come with check-writing privileges and debit card access, making it even easier to access your money in the event of an emergency. However, they may also require a higher minimum balance to open and maintain the account, and some charge monthly fees as well.

Certificates of deposit (CDs)

Certificates of deposit (CDs) offer fixed interest rates that are generally higher than those of savings accounts and money market accounts. They require you to deposit a certain amount of money upfront and keep it in the CD for a set term, ranging from a few months to several years. While CDs are less liquid, meaning you can’t access your funds without penalty before the term ends, they may allow you to earn more interest. You might consider a CD for storing a portion of your emergency fund that you feel comfortable locking away for a while.

Common emergency fund mistakes to avoid 

Underestimating expenses

If you underestimate your monthly expenses, your emergency fund might not be enough to sustain you during a financial crisis. When setting your savings goal, thoroughly review your spending over the past year to be sure you include all necessary expenses. And remember that as your circumstances change, you might need more in your emergency fund. Review your finances annually to see if you need to adjust how much of an emergency fund you should have; if your lifestyle has shifted, you might need a bigger buffer. 

Ignoring inflation

Inflation can significantly erode your purchasing power over time, reducing the real value of your savings. Regularly review and adjust your emergency fund to keep pace with rising living costs. If you’ve already hit your savings goal for your emergency fund, you might need to add more to it after a while to account for inflation. And if you’re still building up your fund, periodically check in to see if inflation has increased the amount you’d need to cover three to six months of living expenses. 

Using the fund for non-emergencies

It can be tempting to dip into your emergency fund for non-urgent expenses, such as a vacation or an expensive item you really want. However, doing so can deplete your safety net and leave you vulnerable in times of actual need. Establish clear criteria for what constitutes an emergency and stick to them to ensure your fund is available when a real emergency arises.

Start building your emergency fund

How much emergency fund you should have depends on multiple factors unique to you. Once you calculate the total amount you want to save and start putting money aside every month, you’ll be on your way to building a robust safety net that protects you from unexpected financial shocks, helps you avoid going into debt, and sets the stage for long-term financial health. You don’t have to have a lot of money to begin with; slow-and-steady saving will add up over time. Start today and take control of your financial future.

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Emergency fund frequently asked questions 

How much should I save if I have irregular income?

For those with fluctuating incomes, such as freelancers or gig workers, you might want to aim for six to twelve months’ worth of expenses to cushion against income variability. When you’re making more money, you can put some of it into your emergency fund so that you can tap into it during periods of reduced income. 

Is it ever okay to have less than three months of expenses saved?

Saving up enough to cover three or more months’ worth of living expenses can feel intimidating. If you’re just starting your emergency fund, it can feel more attainable to save up enough for just one or two months. After that, you can keep your momentum going and eventually build up a bigger safety net. Also consider your debt situation: if you have a lot of high-interest debt, like credit card balances, it may be wise to prioritize paying it down so that you’re not saddled with mounting interest. 

What is a good amount of money for an emergency fund?

Most financial planning professionals suggest that three months of living expenses is a good amount for an emergency fund to begin with, and suggest working up to six months or more for additional financial security. However, your particular situation and lifestyle affect what looks like a good amount for you, so consider things that affect the level of cushion you need, like your job stability, family size, and situations like ongoing healthcare needs.

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