If you need them, emergency funds can really come in handy, but figuring out how much to save can be challenging. A common rule of thumb states that you should plan for three to six months’ worth of spending. However, there are some situations where you would desire to save up to a year’s worth of living expenses.
If that seems like a lot, you’re not alone, but you don’t have to save it all at once. Based on your circumstances, we’ll help you determine how much of an emergency fund you actually need and how to begin creating it.
Main Points
Although three to six months’ worth of costs should be kept in an emergency fund, some circumstances call for more.
A smaller emergency fund is advised by some experts while you are paying off debt.
You may be able to save less if your employment is stable and you don’t have many costs.
You might need to save more if your work isn’t stable and you have greater costs.
Instead than focusing on the large target amount, concentrate on creating a saving habit.
What Is the Suggested Minimum Amount for Your Emergency Fund?
The majority of financial professionals advise having three to six months’ worth of spending on hand in case of emergencies. That’s a rather broad range, and choosing which end to aim towards relies on a number of different things.
Savings for three to four months’ worth of costs could be sufficient if:
- Your general health is good.
- You don’t owe a lot of money.
- Your area has a low cost of living.
- If you own a car, it’s dependable and you rent.
- If you lose your current job, finding another one won’t be difficult.
- You don’t have any dependents on your income, including children or pets.
- You have a fairly secure job.
- You can get financial support from your spouse or other family members.
It is advised to save more than six months’ worth of spending if:
- You occupy a region with a high cost of living.
- If you lose your current employment, it would be difficult for you to locate another.
- You are a home owner (especially if you have an older home)
- If you’re an artist, seasonal worker, or gig worker, your job isn’t especially steady.
- You support dependents such as children, a spouse who stays at home, pets, and other people.
- You engage in high-risk activities or have a medical condition (like rock climbing or BASE jumping)
- You don’t have any financial allies.
It is good to save a year’s worth of living costs if
- You earn a lot of money
- You hold a specialist position that may need relocation or extra time to replace.
- You are the only one who can support many dependents.
- You’ve retired or are about to retire.
Many folks will be a combination of these. However, think twice about saving less money if you feel like your life has more potential for risk.
Building an Emergency Fund
Determine the appropriate size for your emergency fund and take action to add to it.
- Make a saving target: Based on your unique situation and risk variables, decide how many months of spending to save—between three and six months.
- Determine the costs for a single month: Only include costs that you would still have to pay for in an emergency, such as rent, groceries, and bills. Don’t include other costs like flights and restaurant meals.
- Calculate how much you need to save by doing the following: The amount of months you want to save is multiplied by your monthly expenses. For instance, if one month’s expenses are $2,000 and you want to save enough for four months, your goal is a $8,000 emergency fund ($2,000 x 4).
- Save money automatically: Automating your savings will increase your chances of success. Set up automatic transfers from your checking account into your savings account once you have decided how much you can afford to save each month.
- Profit from opportunities for savings: If you come across additional funds, such as a tax refund, side hustle revenue, or even a $20 bill in the parking lot, deposit it in your emergency fund to get closer to your goal.
If achieving your goal seems challenging, try not to get overwhelmed. Just keep in mind that you won’t need it all at once or even in a year. Consider your emergency fund as a continuous process, similar to your retirement savings account. Once you succeed in achieving it, you’ll have additional cash each month to use for other objectives.
Why, Generally, the Emergency Fund Rule of Thumb Works
An emergency fund is meant to guard you from common worst-case monetary events, like losing your job. Many people find that three to six months’ worth of costs gives them more than enough time to find another employment, even if it’s only a temporary stopgap or part-time position while they’re still looking for work.
Additionally intended to cover lesser unforeseen events, such as:
- An ill animal Home repairs
- A malfunctioning vehicle Surprise medical bills
Note
It’s crucial to practice discipline. A flash sale or pricey present shouldn’t be justified as an emergency just because you desire it. Although it may be difficult, you must fight temptation in order to protect your family and yourself in the event of a genuine emergency.
If you lack the funds necessary to address a pressing issue, you risk incurring debt or worse. Additionally, earning money in a savings account is always preferable to paying interest to a loan.
Salty Grains
There are many general guidelines for how much money to save, and the three-to-six-month emergency fund goal is just one of them. Here are a few more examples:
The $2,467 Golden Rule
One of the major psychological obstacles to saving three to six months’ worth of costs is: Why even try when it looks so high? A recent study indicates that families with lesser incomes may not need to save as much, nevertheless.
Lower-income families may be able to get by with as little as $2,467, according to researchers at the Universidad Diego Portales and the University of Colorado at Boulder. Naturally, more is always preferable (to a point), but if achieving this goal inspires you to save money, go for it. 1
An Emergency Fund with Two Steps
Some gurus, including Dave Ramsey, advise building your emergency fund in two stages. If you have debt, Ramsey advises setting up a $1,000 “starter” emergency fund first. Once the debt is paid off, switch your payments to fully funding an emergency fund with three to six months’ worth of spending. 2
Note
It’s not much to have a $1,000 emergency fund, especially if you have a family, a career that is insecure, or you reside in a high-cost of-living area. Don’t wait to start saving for an emergency fund substantial enough to cover your necessities if paying off debt is anticipated to take years rather than months.
The ideal amount can only be chosen by you.
Only you may decide the size of your emergency fund, which is intended to protect you in case of a financial disaster. Keep in mind that you won’t need it all at once. It’s okay to advance slowly toward your objective as long as you’re moving in the right direction.
Questions and Answers (FAQs)
Where should an emergency fund be kept?
An emergency fund is best kept in a savings account that is linked to your checking account. Either at the same financial institution or online, you might open a high-yield savings account. Remember that it can take a day or two for money to move to your checking account if you create a savings account with an online-only bank and have a checking account with another bank.
How much money should you put up for retirement?
You should save aside enough money for retirement to cover the difference between your anticipated living expenses and fixed sources of income like Social Security and pensions. The earlier you start saving, the more you may take advantage of interest, reducing the amount you need to set aside. You can use retirement calculators to figure out how much money to save. The amount of money you should set aside for retirement and the best way to invest it can both be decided with the aid of a financial planner.
