How Big Should Your Emergency Fund Be?

We’ve all heard about the importance of saving for emergencies. But have you ever wondered how big should your emergency fund be? Me too!

It’s no secret that life happens and that having some cash saved for a rainy day is a great idea. Your car might break down, your home might need a water heater, or you could lose your job.

Not to mention that 69% of Americans can’t cover a $1000 emergency, and 45% have nothing in savings at all!

$1000 probably won’t last very long if you have rent or a mortgage to pay, and the average car repair bill is $500-$600.

Most Americans are one emergency away from a major financial setback. And that’s no way to go through life!

Having an emergency fund is more important now than ever. But just how big should your emergency fund be?

The answer is, it depends. Most experts recommend 3-6 months worth of expenses, but your individual situation could change that!

Don’t save enough, and you risk putting your next car repair on a credit card and going into debt.

Save too much, and you might be losing value of your cash due to inflation!

This post will be all about how to calculate how big your emergency fund should be, where to keep it, and how to build an emergency fund so that you’re prepared for life’s unexpected events.

After reading this post, you’ll be on track to for a fully-funded emergency fund savings plan in no time!

What is an Emergency Fund?

The purpose of an emergency fund is to keep you from going into debt when something unexpected happens.

Your emergency savings should be kept separate from your sinking funds. A sinking fund is money set aside for a specific purpose (such as routine maintenance on your vehicle, a vacation, a new car purchase, ect).

Sinking funds are for large, expected purchases. They are not emergencies. Therefore, do not go out and purchase a new mattress with your emergency fund!

Where to Keep Your Emergency Fund

Keep your emergency fund in a high-yield savings account. A high-yield savings account is just like a regular savings account, except it pays you a higher interest rate.

High-yield savings accounts are typically offered by online banks with no brick-and-mortar locations. Since they don’t have as many overhead expenses, they can afford to pay you a higher interest rate on your savings.

If you’re tempted to transfer money from savings often, having your emergency fund in a separate bank could be beneficial, since it’s more difficult to transfer money to an external bank.

I use this high-yield savings account with Ally Bank! Any online bank works as long as it’s FDIC insured and doesn’t have monthly account fees.

How to Calculate How Big Your Emergency Fund Should Be

Everyone’s savings target will be different depending on their income and lifestyle. When calculating a months’ worth of expenses, only use necessary expenses.

If you lose your job, you can stop shopping, but you still have to pay the electric bill.

Here are examples of what to include in your NECESSARY monthly expenses calculation:

• Rent/mortgage
• Utility bills
• Groceries
• Insurance premiums
• Minimum debt payments (credit cards, student loans, car payment, etc)
• Cell phone
• Gas

Here are examples of UNECESSARY expenses not to include in your monthly expenses calculation:

• Eating out
• Concerts
• Shopping
• Bars
• Traveling
• Subscriptions

If you lost your source of income, you’d be in super-saver mode and cut all unnecessary expenses.

Using your emergency savings means that you are in an emergency, so you need to have a separate “crisis mode” budget with lower expenses.

Create a budget with all these categories (grab a copy of this template if you want the hard work done for you!) and see how much one month of expenses costs for you.

Multiply this by 3 or 6 to get a fully-funded emergency savings target!

3-6 months is a good baseline goal when starting to build your emergency fund.

4 Things to Consider When Saving an Emergency Fund

While a 3-6 month emergency fund is a great start, you can always fine-tune the amount based on your lifestyle and financial situation.

Here are a 4 things to consider when building up your emergency savings, regardless if it is your starter emergency fund or a fully-funded 6+ months’ fund:

High-Interest Debt

High interest debt (such as credit cards, personal loans, or anything above a 10% interest rate) needs to be eliminated ASAP since you pay so much in interest every month!

It can be tricky deciding whether or not to save more toward your emergency fund or work on paying off your credit card debt first.

In this scenario, I’d recommend a month’s worth of expenses as a starter emergency fund until you get that debt paid off. Once it is gone, you can continue to save that fully-funded amount.

Dave Ramsey says that a $1000 starter emergency fund is enough, but I disagree.

Dual or Single Income Household?

Once all of your high-interest debt is paid off, it’s time to beef up your emergency fund!

If you’re in a dual-income household with 2 stable jobs, 3 months worth of expenses is likely all you need. If one person gets laid off, you still have another source of income to get by until they find another job.

Single or depending on one income? 6+ months is probably a better target. If something happens to that stream of income, you’ll want to have a little bit larger cushion.

Think about how stable your job is. Are you in a cyclical industry with frequent layoffs?

The less stable your job, the more money you’ll want to save.

Health Insurance Deductible

If you’re on a high-deductible health insurance plan, consider saving your yearly deductible on top of your 3-6 months’ worth of expenses. If a medical emergency happens, you won’t have to worry about going into debt if something happens.

The higher your deductible, the more secure you’ll feel having that amount saved in addition to your 3-6 months.

Having your deductible saved also means that you won’t need to use your health savings account for medical expenses.

Did you know that you can use your HSA to save for retirement? Being able to pay cash for your health expenses means you won’t have to use your HSA, leaving it propertly invested to grow tax-free for your future!

Homeowner or Renter?

Another point to consider when figuring out how big your emergency fund should be is if you’re a homeowner or not.

Being a homeowner is a huge financial responsibility! You are fully responsible for the maintenance and repairs on your home. And those repairs can add up!

If you own your home, consider saving 1-3% of your home’s value per year for unexpected repairs.

You can start a home maintenance sinking fund, or add it to your emergency fund!

If you’re a renter, don’t have to worry about this! When your dishwasher breaks, you don’t have to pay to fix it.

How to Build up Your Emergency Savings

If you’re just starting to save an emergency fund, set small goals for yourself! It can be really overwhelming looking at 6-months worth of expenses.

Start with saving your first $1000. Then one month of expenses. Then 3 months. And so on!

Focus on reducing your unneccesary spending and adding that to your emergency savings. Sell things you no longer need.

If you want to build an emergency fund even faster, consider downgrading your car, getting a roommate, or picking up a second job. The possibilities are endless if you’re willing to work for it!

Work on creating a gap between your income and expenses, and save the difference until you’ve built a fully-funded emergency fund!

How to Create an Emergency Fund Savings Plan

The first step for almost everything in personal finance is creating a budget.

You have to know how much you bring home every month and how much your monthly expenses are.

Once you know what’s left over to work on financial goals, you can plan out how much you can save per month and how long it will take to reach your savings goal.

Check out this budget template to help you get started making your first budget! There is a built-in section for an emergency fund already done for you.

Let’s say you want to save $5000 this year toward your emergency fund. $5000 divided by 12 months = $416. Save $416 each month for a year and you’ll end up saving $5000!

The total amount needed divided by the monthly amount you can save equals the amount of time it will take to reach your savings goal.

Focus on saving that monthly amount instead of on the entire $5000. $416 is a lot less intimidating than $5000!

You can even do a savings challenge and see where you can find extra money in your budget each month to beat your goal!

In summary, everyone will have a different savings goal for their emergency fund, but the process to save it is the same for everyone.

This post was all about how to build an emergency fund savings plan and how to calculate how big your emergency fund should be.

Do you have an emergency fund? Let me know your thoughts on how much you keep in it in the comments below!

I’d love to hear from you!

-Megan