How Much Should You Have in Your Emergency Fund?

Even if you've worked for the same company or in the same field for many years, there's still uncertainty around employment. Plus, sudden events can increase your living expenses instantly, so it's key to be prepared. What's the ideal emergency fund size to ensure you're ready for what might come?

Having an emergency fund is a crucial step toward financial stability. No one is immune to emergencies, and you never know when they may strike, whether through illness or an accident or a layoff from your job.

I've certainly experienced sudden drops in income when freelance clients dried up, but thankfully my emergency account was there to cover costs until I could replace that income. If you don't currently have an emergency fund, there's no time like the present to start building one.

Of course it's a good idea to "just start" if necessary, but eventually you'll want to settle on the ideal amount for your emergency fund.

Why an emergency fund is important

An emergency fund is just what it says it is — a reserve of money you can use when something comes up and you have to pay for it right away. You may have a car accident or another medical event, or you may need to fly cross-country to help a loved one in their own emergency. All of these things can be costly.

So what is an emergency fund? Well, it's a place to put your money so you don't access it on a regular basis. You access it only when you're in a tough financial spot.

An emergency fund can help you cover unexpected expenses or handle regular living expenses when income drops. It's intended for true emergencies — that is, situations in which payment can't wait.

A study by Empower indicated that 37% of Americans would struggle if facing an unexpected $400 expense, and 21% of those surveyed had no emergency savings.

Your emergency fund might not be the only source of funding when you run into an unexpected problem. If you can use your money and tap into other resources, do that as well. It will reduce the chances of depleting your emergency fund and make it easier to rebuild your savings later.

In some cases, especially if there is a prolonged emergency, such as long-term job loss, you might need to supplement your emergency fund with alternative resources, such as the local food pantry or unemployment benefits.

Good uses of an emergency fund

Just to offer a few examples, here are some potential circumstances when it's wise to dip into an emergency fund:

• Sudden car repairs
• Repairs to your home (replace or repair roof, essential appliances, deal with plumbing leaks, etc.)
• Pay for medical bills not covered by insurance
• Cover budgetary expenses during a period of unemployment
• Unplanned travel expenses (for example, for a relative's funeral)

Having those funds on hand can really ease the stress of already-stressful situations. A few years ago while on a trip through Indianapolis, our family vehicle broke down and needed a nearly $2,000 repair. Plus, we were away from home and had to spring for a night in a hotel at the last minute.

While we didn't enjoy spending that money, the fact that we had it easily accessible in our emergency fund meant that we weren't in any real danger. We got home just fine. Without funds set aside, we'd have had to resort to credit cards.

Risks of not having an emergency fund

If you don't have any emergency fund at all, let alone the ideal emergency fund size, you're exposing yourself to a lot of risk. I don't say that to invoke guilt, but to alert you to the reality that not expecting emergencies could cost you a lot more in the long run.

Without money intended for emergencies, what can happen is that you end up putting unexpected bills on your credit cards. While I love credit cards when you can pay them off in full, if it's an emergency that you can't pay for and you'll carry a balance, you'll rack up credit card interest charges.

As of May 2024, the Federal Reserve reported the average interest rate on credit cards that assessed interest was 22.76%.

If you put a $1,000 emergency expense on a credit card with that interest rate and could only pay $50 a month toward it, it would take you two years and two months to pay it off, including the additional $269 in interest charges.

Not only do you risk accruing interest and fees when you handle emergencies this way, but your credit score may dip due to your having a higher utilization ratio. Plus, you're less able to save money, since you'll have to come up with the money to pay off that debt somehow, which could mean you delay building your emergency savings even more.

What is a good-sized emergency fund?

Now that we're clear on how important an emergency fund is, let's talk about the ideal emergency fund size.

Financial experts often recommend putting enough money into savings to cover three to six months' worth of expenses in case of an emergency. This is a good rule of thumb and can work for most people.

And when we talk about "expenses" in terms of an emergency fund, we mean only the necessities. So if you looked at your budget and picked out the expenses you really can't avoid, those are the ones you want to include in your total.

Necessary expenses:

• Rent or mortgage payments
• Car insurance premiums
• Health insurance premiums
• Food
• Utilities
• Debt payments

These are also instances when it's okay to use your emergency fund, though you can't really budget for them in your calculations:

• Emergency pet care
• Sudden job relocation
• Weather damage to home or car

On the other hand, skip some other costs when calculating your emergency fund needs: vacations, entertainment, and going out to eat (versus general groceries that are necessities). Don't raid your emergency fund for these types of purchases.

You can add up your monthly 'bare-bones" expenses and multiply that number by the number of months you'd like to cover. Your situation won't be the same as mine because your bills aren't the same as mine.

Typically, an emergency fund that would keep you afloat for three months, six months, or 12 months is sufficient. Let's dig into how you can make the most informed decision about your ideal emergency fund size.

Three-month emergency fund

An emergency fund might work if you're confident that you could quickly reduce certain expenses if needed, such as car repairs or medical bills. Having multiple sources of income in case of job loss, such as a side hustle or a partner who works, will also help in maintaining your emergency savings in your checking account or savings account.

A three-month fund can also work if you have other sources of savings or investments that you could access in an emergency.

Six-month emergency fund

Six months' worth of expenses in an emergency fund is a worthy goal. To me, that's honestly the minimum I need to feel comfortable about the future, though that doesn't mean it's ideal for everyone.

If you work in a field where it might be harder to get a new job after a layoff, going for a larger fund of six months is a good idea. This might be the case if you're a contract worker rather than a salaried employee or if you support multiple dependents.

12-month emergency fund

Obviously, setting aside a full year's worth of expenses for emergencies is a pretty big undertaking. Some people who may be better off with such a large stash are freelancers or contract workers who can be let go at the drop of a hat (and don't get unemployment benefits or severance pay). Or if you're at a level within your field that's particularly competitive, jobs are hard to come by, so that 12-month emergency fund can be a fantastic cushion.

If you're the only source of income for multiple dependents, that's another reason to pad your emergency fund beyond three or six months' worth of money.

How to build an emergency fund

As you prepare for uncertainty, doing what you can to increase your emergency fund size can make sense. Here are some basics for creating and building emergency savings.

Decide where to keep your emergency fund

Your first step is to figure out where to keep your emergency money. Some of the things to consider when deciding where to put the money include:

• Accessible: You want your emergency fund to be relatively liquid. An account where you can access your money, either through a debit card or by transferring it to your checking account fairly easily, is important.
• Not too accessible: Although you want liquidity, remember that you also don't want your account to be too easy to access. You don't want to be tempted to use the money for non-emergencies. I like keeping an emergency fund in an entirely separate account that requires an extra step to access the money.
• Yield: Look for a bank account that helps you earn a higher interest rate on your money. This could be a high-yield savings account or a money market account. What is a high-yield savings account? In general, it's one that pays much more than the interest rate you might see with a traditional account.

Be sure not to put your entire emergency fund into an account you can't get to, such as a retirement account with penalties for early withdrawals. The same goes for certificates of deposit (CDs). While you can try a CD ladder emergency fund to take advantage of favorable CD interest rates, high-yield savings accounts often provide equal or better rates without early-withdrawal penalties, so they're probably easier to use.

Set your target emergency fund size

Next, determine your target emergency fund size. How big are you aiming for? You might also consider a tiered approach, with emergency funds in different places.

For example, I keep at least a $1,000 cushion in my checking account even though there's no interest paid, just because I like the feeling of security it gives me. (It's not ideal, I know, but it works.) Then I keep the majority of my emergency fund in a high-yield savings account. We also have additional emergency funds in taxable accounts, where the money tends to earn a higher rate of return.

Look at your expenses, and consider how big you want your emergency fund to be, including whether you want to divide your fund into short-term and long-term accounts.

Figure out how much you can contribute regularly

If starting from zero, once you have a set target, decide how much you can contribute to your emergency fund regularly. Maybe you feel like you can stash $200 a month until you've met your savings goal. On the other hand, perhaps you feel like you can only set aside $10 per week. No matter what you can contribute, getting in the habit of thinking about emergency savings is vital. It's OK to start small and build up. Over time, as your finances improve, you can increase your contributions until you reach your target.

After reaching your target emergency fund amount, you can divert that monthly contribution to other goals, like investing for retirement or saving up for other goals.

Make it automatic

Finally, consider making your emergency fund contributions automatic. Rather than thinking about how much you're adding to your account each time, or remembering to move your money into your emergency savings, set up automatic transfers. That takes the decision out of your hands and may help you to effortlessly build savings.

Many of the best banks offer a way for you to set up automatic transfers — and most often, the process is simple and quick. It's also easy to increase your periodic contributions, or decrease them if something gets in the way.

What if you can't save the ideal emergency fund size?

Now, here's the big question behind the question. Of course, it's smart to tally up your "ideal" emergency fund amount based on how many months you want to be prepared for. But what if that number is simply out of reach?

A lot of people may hear the words "three-month emergency fund" and laugh because it sounds impossible. What I worry about is that then you might give up and not bother saving anything at all, and that would be the worst thing you could do.

If times are tough or you're living paycheck to paycheck, this advice about emergency funds might sound judgmental or out-of-touch with reality.

So what I want to say is, do the best you can. You may need to ask your creditors for a reduction in payments or interest rates. Or you might need to focus on finding more work. If you can't save up three, six, or 12 months' worth of expenses, then try to save something.

Try to get some sort of minimal emergency fund going, even if the "ideal" amount isn't possible. Every little bit helps.

FAQs

Bottom line

I want you to have the peace of mind that comes from building a solid emergency fund, because all of us face sudden expenses at times. However, it's fine if it takes some time to reach your target emergency fund size.

Review your financial situation and figure out how much you can set aside each month. Then work on getting in the habit of prioritizing emergency savings. Over time, you can build up an emergency fund that works for you and helps you reach your financial goals.