How Much Do You REALLY Need In Your Emergency Fund?

by Connie Mei · 16 comments

Emergency funds are necessary. We all need to be prepared for those unplanned rainy days. Therefore, it’s not a question of whether or not we need an emergency fund, but how much of an emergency fund we really need.

When speaking with others about their emergency funds, I’ve encountered funds anywhere from a few hundred dollars to tens of thousands of dollars. There’s really no magical number. Everyone’s situation is different and hence, the optimal size of an emergency fund will vary from person to person. Here are some tips to help you decide how much to put into your emergency fund:

The Rule Of Thumb

While there is no right or wrong answer, it is generally recommended that you should save three to six months of expenses in your emergency fund, leaning towards six to be cautious. For example, if your expenses amount to $3,000 each month, you should aim to save $18,000. As you build your emergency fund, aim to put 10% of each paycheck into your fund.

Don’t Underestimate

One of the key numbers you need to understand to help build the emergency fund is how much you actually spend. Everybody tends to think of the big numbers, like rent, utilities or food when thinking of expenses, but what about transportation costs? Or even your daily cup of coffee? Be realistic when you are calculating your expenses and try to be as thorough as possible. You don’t want to underestimate your expenses and end up not having enough.

Saving Too Much Could Be Bad Too

On the flip side, saving too much could be a negative too. There is an opportunity cost to having an emergency fund. On one hand, you have cash on hand that you can use whenever needed. However, on the other hand, it’s money you could be investing and in turn, using to build your wealth with. That’s why it’s so important to understand your expenses and plan ahead as much as possible.

Understand Your Situation

Having three to six months of expenses built up in your emergency fund is a good starting point. But from there, you can personalize your emergency fund by understanding your situation. Perhaps you don’t need that much saved up because you don’t have debt or have a second income to fall back on, like your spouse’s or from a side job. Or maybe you need more than six months because your job is on a freelance basis and your income is unstable. Every situation is different so finding the right size fund for you is crucial.

Whether you have saved up enough or not, it’s at least important that you start. Begin building your emergency fund today if you haven’t already. Over time, you can analyze your spending and better understand how much you really need in your fund. Don’t ever delay starting a fund just because you don’t know what number to shoot for.

How many months of expenses do you aim to save in your emergency fund? Why?

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

Money Saving Tip: An incredibly effective way to save more is to reduce your monthly Internet and TV costs. Click here for the current Verizon FiOS promotion codes and promos to see if you can save more money every month from now on.

{ read the comments below or add one }

  • Leslie Tayne says:

    Great article David! I totally agree that having an emergency fund is absolutely crucial. In my opinion, a great first step to creating financial stability for your future is to put your needs in front of your wants. This way you can differentiate between essential items that you actually need, and nonessential items that you could cut back on.

    The actual amount people need to save depends on their personal situation, but I find that saving up at least 3 months worth of expenses to be one of the most reasonable amounts!

  • AnnieG says:

    We have a year of expenses. We also have savings for upcoming expenses like car, travel, durable goods, property taxes, and money to add to our charitable fund. So currently our cash funds are about 1/10th of our total net worth. Even though we are only earning 1% interest, we are much more comfortable with a large cash cushion.

    • David Ning says:

      The being able to sleep well at night factor can never be understated. Good for you to have figured out the amount that works for you!

  • Josie says:

    We got about 4-5 months + an HSA with the full deductible of our insurance. Now we are saving for a house down payment in the same account. I wonder if it would be a better idea to have a complete separate one..we have a soft goal of 20K for a down payment but we are unsure of the time frame to purchase or even where we want to settle. I figure we just hit that goal ASAP and then bump our retirement contribution which at this point is just 5% with some matching. its making me a bit anxious to not increase the contributions now but we also want to have that downpayment ready for whenever is time to pull the trigger. Any suggestions are welcome (we are 30 and 34..and follow the Dave Ramsey plan. currently in step 3B so no debt and EF is pretty much set up as I said earlier)

    • David Ning says:

      I vote for using the same account for your down payment and emergency fund, but only if you will never deplete the account below the emergency fund amount when you buy a house. That way you keep the simplicity of having fewer accounts.

      Personally I would contribute to the retirement accounts at least up to the maximum that the employer will match since that’s free money. Making the move is like getting a raise but that’s just me. This will of course delay the house purchase so you have to weight whether getting into the house is worth THAT much to you.

    • Mr. PTM says:

      If it’s appropriate for your situation, you could consider high yield savings accounts with NetSpend or Mango Money. They’re FDIC insured and earn a fixed 5-6%. That kind of guaranteed rate is almost impossible to beat. Some people report concerns around how quickly you could ACH money out in an emergency, but I’ve never experienced a problem. If you want to know more, TheFinanceBuff has a couple of excellent write ups on his site.

  • Travis @enemyofdebt says:

    I define an emergency fund differently. I have $1000 in complete liquid form for unexpected expenses (medical, auto, appliance repair, whatever). Everything else just goes into semi-liquid investments. If I ever have a financial crisis (like job loss), it’s there. Otherwise, it just grows for retirement.

    • David Ning says:

      That’s a good plan too for people who have accumulated a bit of a stash Travis. I have a similar strategy. Between a bit in the checking account, the credit card limits, access to low variable rate loans I can draw upon at will, plus a chunk in fixed income, I’m pretty much covered for any emergency.

  • Allan @practicalsaver says:

    Although the general rule is 3-6 months worth of living expenses, I’d say add 2-3 months for buffer. It’s better to be safe than sorry.

    What I did with mine was when I reached the 6-month, I kept on adding a few dollars here and there. I set the 6-month as my goal and the rest is just added bonus.

    • David Ning says:

      9 months is fine too, and I bet you didn’t feel you sacrificed much to get that few extra months of savings either!

  • ben says:

    Should unemployment ‘benefits’ be considered? Or should the emergency assume you’ve walked away from a job and thus not eligible?

    For example, if total monthly expenses are $4500 in So. Cal, should the 6-month emergency fund be the full $27k, or the difference between what to expect from unemployment ($1.8k*6) = $16.2k?

    • David Ning says:

      The general rule of thumb doesn’t include unemployment. Keep in mind that an emergency could be a sudden big car repair bill so it needs to cover accidental expenses even if you are still employed.

  • Jordan says:

    We have about 4 to 5 months. We feel comfortable with that amount. Anymore in the bank, and I we feel like it’s kind of a wast sitting there. We’re also completely debt free and have two incomes so we feel pretty secure. Besides that we’re both 26 and early on in our careers with no kids. In the future when kids come along not only will we bump it up because monthly expenses will be higher, but we’ll also probably go up to 6 months because of the kids. You really just need to talk it over with your spouse and figure out whatever you’re comfortable with. Maybe 9 months worth of expenses is what makes you feel most comfortable. To each his own.

    • David Ning says:

      Having a well thought out plan is really the key. Good to hear that you’ve discussed this with your love one and will consider increasing it as your needs increase.

  • Derek at says:

    I think the 6-month of expenses rule is a pretty good one that will work for 90% of folks. I try to stick by this, and it has worked well so far 🙂

    • David Ning says:

      6 months is definitely good insurance. And plus, you aren’t losing much interest versus other fixed income solutions anyway.

Leave a Comment