Recommended Emergency Fund Amount: How Much to Save in an Emergency Fund
In this article I am going to discuss an important question: how much should you save in an emergency fund as a recommended emergency fund amount? Read on to find out what an appropriate amount might be for your circumstances.
Why do I need an emergency fund?
Before we talk about how much to save in an emergency fund, though, I want to briefly talk about why I feel that an emergency fund is essential for every family.
An emergency fund is crucial because you are going to have emergencies! You’re not immune to challenges and problems. The average American family faces a large financial setback (of several thousand dollars or more) at least once every 10 years, so you need to be prepared for that eventuality. And less severe financial hardships that cost $1,000 or less happen more frequently than that.
How much do I need to save as a recommended emergency fund amount?
OK, now back to the question of how much to save as a recommended emergency fund amount. Most financial experts recommend saving between three and six months’ worth of expenses (not income—expenses) in an emergency or rainy day fund. I know of one financial expert who recommends saving at least eight months’ worth of expenses in an emergency fund, and another who recommends closer to a year’s worth of expenses. And if you have the financial means to save up that much money over time in your emergency fund, that is wonderful! However, three to six months’ worth is adequate in most circumstances and is a more realistic goal for most families.
If you are wondering whether to lean more toward three months’ worth of expenses or six months’ worth of expenses, here are some things to consider related to your employment and your recommended emergency fund amount:
- Do you live on one income, or two?
- If you live on one income, how quickly could the nonworking spouse find a job, and would his or her expected income cover your expenses?
- How stable is your current job situation?
- Have you been at your job for years, and are you likely to stay there?
- Are you self-employed or do you work solely on commission?
- Is your company financially strong, or has there been talk of downsizing or budget cuts?
- How much is your income, and how much could you cut your monthly expenses if you needed to?
And here are some questions related to your expenses (or likely expenses) and your emergency fund:
- How old is your home? Is it likely to need major repairs any time soon?
- How old are your cars? Are they reliable, or do they need fairly frequent mechanical work?
- Will any of your vehicles need to be replaced fairly soon?
- How is the health of those in your family? Is there anyone who needs frequent or costly medical care or is likely to need it in the foreseeable future?
- What is your current family situation? Are you hoping to have children or have more children?
- Is one spouse likely to want to leave the workforce in the future?
- Are you hoping to purchase a home in the future? Will it likely be a newer home, or a fixer upper?
All of these questions could effect how much you should save in your emergency fund.
In general, my recommended emergency fund amount is to lean toward a six-month emergency fund if you can. Personally, I think the extra peace of mind is important and may give you the courage to do the other things with your finances that you need to, like investing in good stock mutual funds for retirement. However, if you have two incomes, you are in a stable job situation, you don’t have any major medical conditions in your family, you are not anticipating any major life events soon (like the birth of a child or purchase of a home), your house and your vehicles aren’t too old and your vehicles are reliable, and so on, then a three-month emergency fund may be fine for your circumstances.
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How quickly should I try to save up the recommended emergency fund amount?
Your goal should be to reach a fully funded emergency fund (EF) of three to six months’ worth of expenses (again, not income) as quickly as possible. If you don’t know how much that would be for your family, then it’s time to create a monthly budget so that you can find out! 🙂 If you can, try to save this amount in 12 months or less, once you have paid off all nonmortgage debt. If you can save it up in six months’ or less, that would be ideal!
Set up automatic transfers to transfer money into your emergency fund savings account every time you get paid or at least once a month until your EF is fully funded. Even if you’re in a situation where, because of a tight budget and circumstances where you or your spouse may not be able to take on much extra work, you can’t save very much each month, even $50 to $100 will add up over time and go a long way toward providing a needed barrier between you and Mr. Murphy.
And then when circumstances changes and you are able to save more money toward your emergency fund, do!
Where should I keep the money in my emergency fund?
Your recommended emergency fund amount should be in a separate savings account at a bank where you have a (fairly) easily accessible checking account so that you can transfer the money over fairly quickly and use it if needed. Though you probably won’t get as high of an interest rate, you may want to have your EF money in a brick-and-mortar bank, not an online bank, so that you have virtually instant access to it either by stopping at a nearby bank branch or by transferring the money from your EF savings account to the linked checking account so you can withdraw the money at any ATM with your debit card.
You could also use a money market account at your local bank or credit union for your EF. Don’t keep the money for your emergency fund in your checking account—that’s a sure way to end up spending it. Again, make sure the money is in a separate savings account. And even though it should be accessible in case you need it, don’t make it so accessible that you are tempted to spend the money for anything else besides emergencies.
For more information on where to keep your emergency fund (which bank might be a good option for you), check out “What Is an Emergency Fund and How Can I Set One Up?”
What should I use my emergency fund for?
An emergency fund should be used only for—you guessed it!—emergencies. Don’t use it unless it’s an actual emergency. That could be an unexpected funeral, an illness, or something that goes wrong that you haven’t yet saved up money (or enough money) for in a separate account to cover (but that you eventually should!), such as a car repair or home repair or needed dental work or similar expense.
Expenses that you should plan for—such as car repairs and maintenance and home repairs and maintenance (once you have adequate funds in these savings accounts to start covering these expenses), a great sale, birthdays or weddings, family vacations, and so on—should not come out of your emergency fund.
For most families, the generally recommended emergency fund amount of three to six months’ worth of expenses is appropriate. Whether you decide to save three months’ worth of expenses or six months’ worth of expenses or somewhere in between, try to save up your fully funded emergency fund as quickly as you can.
When you have an emergency fund with enough money in it to cover most things that could go wrong, there’s something in your psyche that changes. You know that pit in your stomach that you get when you don’t have the money to pay for something you really need like a car repair or a new-to-you appliance to replace one that stopped working? With an emergency fund, that feeling will happen far less often.
And when you get to the point where you have a fully funded emergency fund, that feeling will virtually go away altogether. A part of you that may never have relaxed before is able to. An emergency fund means peace of mind, and that is priceless. Believe me, the effort (and maybe even sacrifice) it takes to get your fully funded EF in place is well worth it!
How much do you feel is adequate for an emergency fund? What is your personal goal for saving for your EF—how much would you like to have saved up and how soon would you like to have it fully funded? Leave a comment below and let me know! I would love to hear your opinion.
Invitation to Share
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