How Much Should I Have in Emergency Savings?
CS
Summary:
Financial experts recommend having three to six months’ worth of emergency expenses set aside in a savings account. This money should be used in case of a sudden job loss or an unexpected medical expense. In addition, you should keep your emergency fund in an account that is easy to access; savings accounts and money market accounts are good options for this.
Everyone is likely to face some sort of emergency within their lifetime. Whether it’s a medical emergency, an unexpected car repair, or the loss of a job, you may someday find yourself in a situation that will require you to suddenly spend a large amount of money. That’s why it’s important to always have an emergency fund handy.
An emergency fund acts as a safety net for your financial health. Any money you set aside can help alleviate some of the stress of an otherwise highly stressful situation, but how much you should save will depend on how much you spend each month. Let’s review what an emergency fund is, when you should (and should not) use it, and how much money you should save in yours.
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What is an emergency fund?
An emergency fund is a pool of money set aside in a savings account to use specifically for an urgent financial matter. An emergency fund is not intended for nonessential expenses, like a vacation or a new car. Instead, these funds are a safety net to be used specifically for any unexpected events that you may need extra money to cover.
Why do I need an emergency fund?
There are multiple reasons why emergency funds are a good idea. First, an emergency fund can help you avoid slipping into your retirement savings or overdrawing from your checking and savings accounts.
Another reason to have an emergency fund is that emergencies, by their very nature, are unexpected. Unemployment, medical issues, urgent repairs, and similar financial situations can happen at any moment. An emergency fund can help you cover a medical bill, an unexpected car repair, or a family emergency, among other sudden expenses.
Finally, having an emergency fund can help both your financial and emotional well-being by making emergencies a little less stressful when they come up.
How much should I put into an emergency fund?
Everyone’s financial situation and emergencies are different, but the general rule of thumb is to have between three and six months’ worth of expenses set aside in an emergency fund. Of course, this doesn’t necessarily mean three to six months’ worth of your current income but rather the amount of money you would expect to spend within that time frame on essentials, including rent, food, monthly bills, medication, and gas.
For example, if you live by yourself and your monthly living expenses amount to $3,500, you’ll want to set up an emergency fund between $10,500 and $21,000.
How to build an emergency fund
If you spend a lot of money every month, saving for three to six months of expenses may seem overwhelming. As a result, you may be tempted to avoid building an emergency fund at all, especially if you’re on a tight budget. But an emergency fund should not be neglected, as emergencies can happen to anyone at any time.
Here’s how to start saving for an emergency fund:
How to save for an emergency fund
- Set a savings goal — As mentioned above, it’s recommended that you have three to six months’ worth of expenses set aside in case of an emergency. First, review your monthly expenses, then calculate how much money you would need to save to cover expenses for three to six months.
- Create a budget — Once you’ve figured out your savings goal, set a budget to achieve it. Look over your monthly income and expenses to determine how much you can afford to set aside each month. Remember that building up an emergency savings fund will take time, so keep saving until you reach your goal.
- Set up automatic transfers — An easy way to put aside money every month is to set up monthly automatic transfers to your savings account. This will ensure that you don’t forget to save for emergencies and that you don’t accidentally spend money that should be going into your emergency fund.
What if I’m on a tight budget?
If you’re living paycheck to paycheck, here are some tips you can use to squeeze emergency savings into your budget:
- Only make minimum payments on your credit cards — Yes, the conventional advice is to pay off your credit card balance in full each month, and you absolutely should try to pay down your credit card debt as soon as possible. However, when you’re trying to build an emergency fund on a tight budget, it can be worth temporarilylowering your credit card payments to put that money toward your emergency savings instead. Of course, you should still make sure to make on-time payments toward your credit cards, and once you have at least three months’ worth of expenses in your savings account, you should definitely go back to paying off as much of that credit card debt as you can afford!
- Cut back on nonessential expenses — Go over your expenses and review all the nonessential items. These can include expenses such as dining out, a subscription to a streaming service, or new clothes you don’t need. While cutting back on these purchases can certainly be difficult, the money you save can go a long way toward building your emergency fund (and once you’ve saved enough, you can go right back to eating at restaurants and watching Netflix!).
- Save your tax refund — Receiving a tax refund is exciting, and you may want to spend it right away. But perhaps a better way to use that check would be to deposit it into your savings account for emergencies. If you don’t need that extra money right away anyway, why not use it to cushion your safety net instead?
Pro Tip
A common tactic to build up emergency savings quickly is to use an automatic savings plan. This method automatically deposits funds into your savings account before it goes to your checking account, so you don’t even have to think about saving for emergencies.
Where to keep your emergency fund
You should keep your emergency fund in an account that’s easy to access quickly without incurring a penalty fee for withdrawal, such as a savings account, a separate checking account, or a money market account. Make sure the account is insured by the FDIC so your savings have an extra layer of protection.
On the other hand, certificates of deposit (CDs) and individual retirement accounts (IRAs) should be avoided, as they usually incur a fee for withdrawing money early. Mutual funds and stocks are also not ideal for emergency funds because the value of your savings may decrease before you need them.
Pro Tip
A good place to keep your emergency savings is a high-yield savings account. These have much higher interest rates than traditional savings accounts, so your savings will generate a lot more interest while they sit in the account, effectively growing your emergency fund even faster.
What should I use my emergency savings for?
An emergency savings account should specifically be used for any sudden expense or unexpected financial emergency that comes up, such as a sudden job loss, an emergency medical procedure, or a car needing an immediate battery or tire replacement.
Here are a few examples of how much an emergency may cost:
| Emergency Expense | Average Cost |
|---|---|
| Home restoration after fire and smoke damage | $3,300 to $22,000 |
| Home flood and water damage cleanup | $1,000 to $4,000 |
| Removing standing water from a home | $2,800 |
| Home repair after an earthquake | $3,000 to $5,200 |
| Emergency room visit | $623 to $3,102 without insurance (depending on your state) |
| Car tire replacement | $50 to $350 |
| Car battery replacement | $50 to $200 |
Remember that your emergency fund is there to help you avoid going into debt. If covering an emergency expense would normally put you into debt, dip into your emergency fund first. And once that expense is taken care of, don’t forget to start adding back to your emergency fund as soon as possible.
When should I stop adding to my emergency fund?
While an emergency fund is crucial, you don’t always need to funnel money into it. As soon as you reach your goal of three to six months’ worth of expenses, you can leave the money untouched in the account. From there, you can get back to paying off your credit card balance in full, spending your discretionary income on nonessential purchases, and working toward other savings goals, such as a vacation or a new house.
FAQ
How much should I put in my emergency fund every month?
Emergencies can happen at any time, so it’s best to build up your emergency fund sooner rather than later. Ideally, you should set aside as much as you can every month until you save enough money to cover three to six months’ worth of expenses. Evaluate your monthly budget and figure out how much you can afford to save each month, then make a plan to put that money toward your emergency fund.
Is $10,000 enough for emergency savings?
That depends on your monthly expenses. If $10,000 will cover three to six months of expenses, then it should be enough to keep in your emergency fund.
How much cash should I keep at home in case of an emergency?
It’s generally advised to have $1,000 to $2,000 in cash in your home in case an emergency arises. Of course, it all depends on your lifestyle and living expenses. If you have an expensive lifestyle or a big family, you may decide you need more than that. Having cash at home could help if there’s a national emergency or a natural disaster when banks may shut down, or it may become difficult to access money online.
Key Takeaways
- An emergency fund, often known as a “rainy day fund,” is an amount of money set aside as a safety net in case of unexpected emergency expenses.
- Most experts recommend having three to six months’ worth of expenses set aside in an emergency fund.
- Emergency savings are specifically intended for large unexpected expenses, such as a medical bill or sudden job loss. They should not be used as “fun money” for nonessential expenses.
- Your emergency fund should be kept in an account that’s easy to access and that won’t charge you fees for early withdrawal.
If you’re looking for somewhere to start saving for an emergency fund, one of your best options is an FDIC-insured savings account, preferably with a high APY and zero monthly fees. That’s where SuperMoney can help. Use our comparison tool to compare interest rates and find the best savings account for your emergency fund!
CS
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.
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