How Much Should I Have in an Emergency Fund?

Since we were kids, most of us have heard our parents and grandparents talk about “saving for a rainy day.” The idea is that you need to put money aside when times are good so that you’ll have some money for when times are bad.

Somewhere along the line, that concept was lost on many Americans, causing savings rates to plummet. Recent surveys also indicate that nearly half of Americans would even have trouble coming up with $1,000 in the event of an emergency.

A solid emergency fund is perhaps one of the most important tools in developing and sustaining financial security. Most financial experts recommend having between three to six months of living expenses socked away because no matter how well things are going, bad things can happen from time to time.

In this post, we’re discussing what emergency funds are, why they’re useful, and, most importantly, answering important questions like, “how much should I have in an emergency fund?”. To top it all off, we’ll show you how to use our interactive emergency fund calculator to help you identify a savings goal and create a budget to get there.

• How much money should I have in an emergency fund?
• Why do I need an emergency fund?
• The emergency fund/debt connection.
• Emergency fund calculator
• What kind of account should I keep my emergency fund in?
• Something is better than nothing.

How much money should I have in an emergency fund?

How much you should have set aside can vary, but most recommendations say somewhere between three and six months worth of post-tax income.

So, if you make $3,000 per month after taxes and deductions for health insurance and retirement contributions, you’ll want to have about $9,000 to $18,000 socked away in your emergency fund. In general, the less stable and uncertain your income (especially for the self-employed), the more you’ll want to have in your fund.

At its core, your emergency fund should be equipped to handle unexpected essential expenses, not extravagances. Emergency funds function well when used in tandem with an emergency budget that prioritizes these high-priority expenses.

Pareto says it is also dependent on the number of income earners in the household, the life conditions and various other factors, such as whether or not the person has short-term disability coverage.

Because so few people have their targeted numbers set aside, she recommends that you put away money on a regular basis over time to eventually meet your emergency fund goal.

Why do I need an emergency fund?

It doesn’t matter how much money you make or how well you plan things out in life, bad things happen from time to time. A hot water heater can spring a leak and flood a room. Your vehicle might break down and need a $1,000 repair, or you could come down with a nasty sickness and rack up medical bills.

In any case, all of these things are going to cost money. Mari Adam of Adam Financial Associates in Boca Raton, Fla., says no matter how well things are going, problems can arise.

“These things happen. You can’t always be prepared for the emotional toll or the hassle, but you can be prepared to handle the bills,” says Adam.

Your “emergency fund” is money you stash away for the sole purpose of handling emergencies like these. Adam says the fund should be in an “easily-accessible” account, usually a savings account, so the money can be accessed without penalty in a day or two.

It sounds simple, but survey data reveals it’s anything but that for many Americans. According to a 2019 survey, approximately 28% of Americans do not currently have an emergency fund established.

In the past, Americans have said that they would charge their credit card, borrow from family or friends, sell something, or open a new line of credit if they incurred an unexpected expense that they couldn’t cover.

Cathy Pareto, a financial advisor in Coral Gables, Fla., says in any case, the lack of an emergency fund not only creates financial stress, but it drives the consumer into debt. Pareto regularly sees consumers “living paycheck to paycheck” with little or no savings set aside to handle emergencies.

“When you’re living like that, you are just an unforeseen accident or event away from complete financial disaster,” says Pareto.

Annalee Leonard, Founder and President of Mainstay Financial Group in Pensacola, Fla., says a solid emergency fund is especially critical during uncertain economic times. A job loss, even for just a month, can devastate a family when they have little funds set aside.

“The economy we live in today is just too unpredictable. You can’t live six months on your credit card. Do that, and you’ll be paying it off for 15 years,” says Leonard.

The emergency fund/debt connection.

Not having a suitable emergency fund can often lead people to debt because, as we discussed, putting expenses onto a credit card is typically the only way they can come up with the money. Leonard says it’s a big problem because it adds interest to the initial emergency and creates a deep financial hole that is hard to crawl out of.

“You’re going to have to put things on a credit card and then you not only have the bill but have to pay 25% interest on that bill. Prepare for things now by saving the money,” says Leonard.

Emergency fund calculator

Emergency Fund Calculator

Your Results:

optimal emergency fund amount:

$0

(6 months of living expenses)

savings per month:

$0

(needed to meet goal by 0 months)

When do you want reach goal?

When do you want reach goal: Start by entering your desired savings timeline — when do you want to have your optimal emergency fund amount met?

years and

months

Months of living expenses needed in savings?

Months of living expenses needed in savings: Adjust the scale for monthly living expenses you want in your emergency savings fund — the recommended amount is between three and six months.

months

Housing/Utility Costs

Housing/Utility Costs: Add your housing and utility costs to each appropriate box.

Rent/mortgage payments:

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Utility payments:

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Telecom Costs

Telecom Costs: Enter telecom expenses (i.e., phone bill, internet).

Phone payments:

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Internet/cable payments:

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Insurance Costs

Insurance Costs: Enter your monthly insurance payments, including car insurance, healthcare, and miscellaneous policies.

Car payments:

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Healthy payments:

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Home payments:

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Other payments:

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Transportation Costs

Transportation Costs: Estimate and add in your monthly transportation expenses, such as gas, public transport, rideshare services, etc.

Car payments:

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Gas payments:

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Public transportation:

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Other payments:

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Debt Costs

Debt Costs: Lorem Ipsum is simply dummy text of the printing and typesetting industry.

Credit card/loan payments:

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Other payments:

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Food Costs

Food Costs: Look at receipts to calculate and add in your monthly food costs for groceries and dining out.

Grocery payments:

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Other payments:

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Depending on your personal and financial circumstances, calculating your optimal emergency fund amount may be easier said than done. Luckily, our easy-to-use and interactive emergency fund calculator can tell you how much you should have in your emergency fund and how much you need to budget each month to get there.

Here’s how to use our emergency fund calculator step-by-step:

1. Start by entering your desired savings timeline — when do you want to have your optimal emergency fund amount met?
2. Adjust the scale for monthly living expenses you want in your emergency savings fund — the recommended amount is between three and six months.
3. Add your housing and utility costs to each appropriate box.
4. Enter telecom expenses (i.e., phone bill, internet).
5. Enter your monthly insurance payments, including car insurance, healthcare, and miscellaneous policies.
6. Estimate and add in your monthly transportation expenses, such as gas, public transport, rideshare services, etc.
7. Add in debt expenses, including credit card and loan payments, and any other outstanding balances that require monthly payment.
8. Look at receipts to calculate and add in your monthly food costs for groceries and dining out.

Once you’ve entered all of the requested information, our emergency fund calculator will generate a suggested emergency fund amount based on your input. Additionally, we’ll provide you with a monthly savings goal to help you work toward and eventually increase your emergency fund over time.

Note: Depending on your life stage and financial circumstances, you may have different emergency fund needs. A college emergency fund, for example, may not need quite as much cushion as a parent with a mortgage and family to feed. Consider your unique situation as you start to build your emergency savings. As your financial situation changes, don’t forget to reevaluate your emergency fund!

What kind of account should I keep my emergency fund in?

Now that you have an idea of how much you should have in your emergency fund, you probably have some follow up questions, like, “where should I keep my emergency fund?”. 

While the money should be readily accessible, Pareto recommends keeping it in its own account to help reduce the temptation to spend it on other things.

The money should not be in your checking account or regular savings account, but perhaps in an online savings account that is tied to your regular operating account.

While taking up to two days to transfer the money might seem like a hassle, it can help minimize the chance that you’ll spend your emergency funds on non-emergency expenses.

Something is better than nothing.

Pareto says some who don’t yet have their goal or may be recovering their account from a previous emergency, may be able to temporarily bridge the gap with a home equity line of credit. These loans can act as an open line of credit by tapping equity in your home.

While you will have to incur debt and pay an interest charge, they’re certainly much better deals than relying on credit cards. Today’s rates on home equity lines of credit are around 5%.

“That is an option, but it does have its drawbacks. And all that assumes that you can even get the home equity line of credit,” says Pareto.

Any emergency fund is also better than no emergency fund. Adam says she has seen people get discouraged, figuring they’ll just throw in the towel if they don’t see it possible to save up three to six months of income.

Adam says to start with what you can and set aside a monthly sum to build as much as you can in your fund. Start with a small savings goal and gradually increase it over time.

Set a goal and start your emergency fund today. No matter how small you start out, something is better than nothing.

Craig Guillot is a business and personal finance writer from New Orleans. He covers insurance, investing, real estate, retirement and debt. His work has appeared in such publications and web sites as Entrepreneur, CNNMoney.com, CNBC.com, Bankrate.com and Investor’s Business Daily. He is the author of “Stuff About Money: No BS Financial Advice for Regular People."