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How Much Money Should Be in Your Emergency Fund?

By Janet Siroto · July 20, 2023 · 14 minute read

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How Much Money Should Be in Your Emergency Fund?

You have probably heard about the importance of having an emergency fund, typically one that holds at least three to six months’ worth of living expenses in a secure but easily accessible way. However, that figure may vary depending on such factors as your age, your cost of living, how many dependents you have, and your health status. And the best place to keep your fund may differ, too, depending on your personal preferences and financial style.

While the amount of money you keep in an emergency fund may not match what, say, a sibling or best friend socks away, there is no denying the value and importance of having this kind of account. An emergency fund can be one of the best ways to ensure that you don’t rely on high-interest credit cards if you’re low on cash and the unexpected happens.

To help you figure out how much you should keep in an emergency fund, read on. You’ll learn such specifics as:

•   What Is an Emergency Fund?

•   How Much Should You Be Savings for an Emergency?

•   How to Calculate Your Emergency Fund Amount

•   How to Build an Emergency Fund

•   Why an Emergency Fund Is Important

•   Where to Keep Your Emergency Fund

•   How to Stay Motivated When Building Your Emergency Fund

Check out our Money Management Guide.

This article is from SoFi’s guide on how to manage your money, where you can learn basic money management tips and strategies.


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What Is an Emergency Fund?

An emergency fund is cash kept in a safe, liquid way to ensure that money is available if you were to face a financial emergency. Typically, experts advise you to have at least three to six months’ worth of savings or sometimes a significantly higher amount (more on that below).

The idea is that if you experience a big hiccup, ranging from job loss to an emergency home or car repair, you would be able to tap these funds. If you were trying to survive financially when laid off, you could dip into this account, too. Doing so would help you avoid turning to high-interest sources of cash, like credit cards, which could leave you with considerable debt to pay down.

It’s important to understand when to use an emergency fund. Typically, you want to only spend those funds when the expense is:

•  Something vital. A pair of shoes you love on sale doesn’t qualify as vital. Replacing a broken hot-water heater? Yes, that likely requires an expenditure ASAP.

•  Something urgent and/or unexpected, such as a medical or dental emergency or a car repair.

•  Something that cannot be paid for any other way (that is, another other way that wouldn’t trigger high interest).

Also worth knowing: An emergency fund should be in a bank account that is insured by either the Federal Deposit Insurance Corporation (FDIC) or NCUA, the National Credit Union Administration. Due to its volatility, the market is typically not a good place for an emergency fund, unless your investments are very low-risk.

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How Much Should You Be Savings for an Emergency?

How much should be in your emergency fund? As briefly mentioned above, most experts recommend that you have at least three to six months’ worth of basic living expenses in the bank.

Example

So what does that look like in dollars and cents?

If you typically spend $4,000 a month on housing, food, utilities, and debt payments, between $12,000 and $24,000 would be enough for an emergency fund.

However, if your monthly living expenses are $10,000, then $30,000 to $60,000 would be enough for an emergency fund in your situation. Some experts would say even more could be ideal.

This amount can seem daunting, but remember, you aren’t expected to have it set aside in one lump sum. You will save up to reach this goal. And if you can’t accumulate that amount, know that something (anything) is better than nothing. Don’t feel defeated and not save at all. If you can put away $1,000 over the course of a year, do it.

One clarification: You may hear the terms emergency fund vs. a cash cushion used interchangeably, but they are actually not identical. The words “cash cushion” are often used to describe a smaller sum kept in your checking account as a hedge against overdrafting.

How to Calculate Your Emergency Fund Amount

If you’re convinced of the value of an emergency fund, it’s time to drill down on just how much to save.

•  Conventional wisdom says you should have between three and six months’ worth of living expenses set aside for an emergency. To calculate your expenses, you might create a line-item budget to see how much money you have coming in and going out. Once you’ve determined your take-home pay, calculate all your necessary monthly expenses including rent or a mortgage, insurance, healthcare, utilities, phone, car, etc. And of course, factor in student loan or credit card debt.

After you track your expenses, deduct that amount from your take-home pay and then see what is left. This is where you’ll need to figure out how much you can realistically set aside each week or pay period for your emergency fund. Aim to accrue your goal amount in a year, if possible.

•  Another method for saving is to look at your insurance deductibles for your medical, dental, household, and car policies. Although it’s no fun, imagine having some kind of accident and needing to pay a couple or even all of those deductibles at once. Make sure you have enough in the bank to cover that amount.

•  You might also see what unemployment would pay you per month if you were to lose your job. See how that compares to your living expenses, calculate the shortfall monthly, and work toward saving, say, six times that amount.

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Factors That Determine How Much to Save for Your Emergency Fund

When considering, “How much emergency funds do I need?” you have already learned that three to six months’ worth of living expenses is a good baseline. That said, there are certain situations that may require a bit more saving, perhaps six months’ or a year’s worth. Some factors to consider:

•  Health: If you or a member of your immediate family has a medical condition, you probably will want to stash a bit more in your emergency fund. You might have additional doctors’ or lab expenses or prescription costs. Or you could be in a situation where your insurance company isn’t paying quickly or at all. Your emergency fund could help you pay the bills.

•  Amount of Debt: If you have a fair amount of debt, it can be a good thing to have extra cash in your emergency fund. Let’s say you have student loan debt, car payments, a mortgage, and credit card debt, as many Americans do. An unexpected expense or loss of work could mean you can’t make all those payments, triggering late and overdraft fees. An emergency fund is protection against that scenario.

•  Cost of Living: It’s no secret that inflation has been extremely high lately. An emergency fund can help make ends meet if a big bill hits when your budget is stretched thin.

Also, if you live in an area with a high cost of living, you may be more vulnerable and need extra emergency funds. For instance, a huge rent increase could make it hard to afford your monthly bills until you recalibrate. An emergency fund could help if a major rent hike comes your way.

•  Job Security: There are no guarantees in life or work, and downsizing is a frequent occurrence these days. An emergency fund can provide backup in a worst-case scenario. Also, if you are a freelance or seasonal worker, your income could be unpredictable vs. those with full-time jobs, so you might want to stow more money in your emergency fund.

•  Children or Dependents: Do you have children or dependents? Then you are probably more vulnerable to having emergency expenses. A kid might have, say, more dental bills than expected. An older relative who relies on you might need you to take time off work unpaid to care for them, or they might have significant healthcare expenses.

•  Having Financial Support: If you don’t have close friends or relatives who might lend you money in an emergency, then it’s even more important to plump up your emergency fund.

•  Your Age: Usually, saving goals vary by age, and so should the amount of cash in your emergency fund. If you’re retired or reaching retirement age, you may want to keep more in your emergency fund, since your medical expenses will likely rise over time and your income might well decrease.

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How to Build an Emergency Fund

If you’re convinced of the value of an emergency fund and ready to start saving, follow these steps:

1. Set a Specific Savings Goal

As mentioned above, most financial pros will recommend that you save three to six months’ worth of living expenses. Calculate that sum, and divide it by 12 or 24 to get your one- or two-year savings plan.

2. Start Small, and Stockpile When You’re Able

If even the two-year savings plan is intimidating, don’t worry. The important thing is to just begin saving and to stick with it. If you only have $25 per month, save that much. Good start!

Also consider growing your savings by depositing windfall money in your emergency fund. Perhaps you’ll receive a tax refund, a bonus at work, a rebate, or other unexpected source of funds.

3. Make Automatic Transfers

It can be a smart move to funnel money into your emergency savings consistently. You could set up automatic savings into your emergency fund just after you get paid; even $10 or $20 per paycheck will build up over time. If you don’t see money sitting in your checking account, you won’t be tempted to spend it.

Or if you have a side hustle (more on that below), you might decide to always deposit 10% or 20% of your earnings into your emergency fund. Yes, you could go on a little shopping spree and feel rich in the moment, but saving it can bring a sense of security while increasing your wealth over time.

4. Manage Expenses and Spending

If you’re feeling you just don’t have any cash available to put toward an emergency fund, consider ways to manage your money better and cut your budget a bit.

Perhaps you could eat out a bit less often, save on streaming services, shop for basics at warehouse clubs, or find other ways to make budget cuts. Once you lower or eliminate some costs, you can put that extra money toward your emergency fund.

5. Don’t Increase Monthly Spending

Do you know what “lifestyle creep” means? It happens when, as you begin to earn more, you spend more. As your income grows, so do your expenses, meaning you don’t build wealth. If you get a raise at work and then lease a luxury car, you will struggle to increase your savings.

However, if your spending stays in check, you can put a portion of your raises toward your emergency savings account.

6. Start a Side Hustle

Another way to pad out an emergency fund is to make more money. You could take a part-time job in any hours you have available, or you might start your own gig. Popular side hustles can be driving for a rideshare service, delivering food, selling items you make online, walking dogs, or helping with social media services. There are dozens of low-cost side hustles that can help you bring in more cash.

7. Gamify Your Savings

One method that might help you sock away money in your emergency fund is to gamify your savings. You can give yourself fun challenges that help you save cash. For instance, you might challenge yourself not to buy any fancy takeout coffee for a month and put the amount saved in your bank account. The next month, you might skip classes at the yoga studio and instead practice at home.

Why an Emergency Fund Is Important

When it comes to having an emergency fund, Americans struggle with what would appear to be a simple, commonsensical idea.

The average person does not put enough in an emergency fund. In fact, 55% of Americans said they could not cover an unexpected $1,000 emergency expense, according to a recent survey. That means they would likely have to either put the amount on their credit cards (which is a form of high-interest debt that can be hard to pay off), borrow, or sell something to cover the cost.

But you could be faced with a much more serious financial hardship than $1,000. Or you might endure a long-term stretch of unemployment or a medical misfortune that could have a nasty impact on your finances.

An emergency fund gives you protection. It can make a huge difference in how well you navigate challenging financial times.

Where to Keep Your Emergency Fund

In terms of where to keep an emergency fund, it’s important that the money be liquid and accessible. When an emergency strikes, you want to be able to access your money quickly, without penalties for making a withdrawal. Some options to consider:

•  An online high-yield savings account can be a good choice. Your money will earn some interest and be available when you need it, unlike, say, a certificate of deposit (CD), which ties up your money for a period of time.

You’ll typically find high-yield savings accounts at an online vs. traditional bank.

•  A money market account is another option. These are typically offered by banks and credit unions and are usually insured by the FDIC or NCUA. They can offer an interest-bearing hybrid of checking and savings accounts, but are not the same as a money market fund, which is an investment.

•  Low-risk investment accounts. As mentioned above, investments can present challenges for those looking to save an emergency fund because they are not insured and the value could fall. In addition, it can take a few days to sell stocks.

However, some people feel comfortable putting their cash in low-risk investments, and a wide array of options are available.

How to Stay Motivated When Building Your Emergency Fund

As you put money into an emergency fund, you may want to try these tips for staying motivated:

•  Find a buddy. Pair up with a friend or relative who is also trying to save and support one another through the ups and downs of the process.

•  Give yourself a pat on the back. Recognize that saving can be hard, and you may not hit your goal every month. But every time you put money in your emergency fund, you are doing something positive for your financial health. Be proud of yourself, and give yourself a little treat now and then to celebrate your accomplishment.

•  Use available tools. Many financial institutions, as well as other companies, offer ways to automate, track, and grow your savings, such as rounding up functions and the like. See what is offered that could help you save more easily.

The Takeaway

Having an emergency fund is an important element of your financial fitness. It’s a cushion of money socked away, to use if you have unexpected, urgent bills or face a loss of income. The amount you should save will vary depending on a variety of personal factors, but typically three to six months’ worth of living expenses is a good figure to aim for. Whatever the amount you want to have in your emergency fund, it’s important to start saving, little by little, so you can enjoy the peace of mind that this account can bring.

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FAQ

How often should I review and update my emergency fund?

It’s wise to review your plan at least once a year. Also take a look when you have a significant change in status, such as getting married, having a child, changing jobs or getting a raise, buying a home, and so forth. You want to be sure the amount in the fund is keeping up with your potential needs.

How do I balance saving for an emergency fund with other financial goals?

It can be wise to put 20% of your take-home pay toward savings, according to the popular 50/30/20 budget rule. Of that 20%, you should definitely put some cash into your emergency fund, since that is a short-term, high-priority goal. Even if you only save $20 or $25 a month toward your emergency fund, saving consistently is a solid financial move.

Can you have too much in an emergency fund?

It’s wise to have at least three to six months’ worth of basic living expenses in an emergency fund. Depending on your specific situation, you might even want twice that. However, since emergency funds are usually held in savings accounts, which don’t earn all that much interest, you might look elsewhere if you have more than that sum to invest and grow.


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