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. Not many people think of transportation costs, or even their daily cup of coffee though. 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 to build your wealth. 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.

You May Not Need a Separate Emergency Fund

In some rare cases, you may not even need money set aside just for emergencies. You shouldn’t put any funds you may need in a hurry at risk by investing it in the stock market, but your investment portfolio can act as your emergency fund when the pot is big enough. For example, no one would expect someone extremely rich (think people like Bill Gates or Jeff Bezos) to have an emergency fund because they have plenty of ways to pay for expenses big and small. When your portfolio becomes big enough where you won’t matter much even if stocks go down 50% and you can still withdraw money to weather any emergency, then it’s time to consider trimming your emergency fund so more of your money can be invested and working for you.

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.

It’s really a great feeling when your emergency fund reaches a healthy and stable amount. You can ease off saving a little and stop worrying so much. Get started building the fund up to par today. Here are a few tips to help you along.

Reduce Spending ASAP

Before you take a step back to decide on your next steps, immediately take steps to reduce all discretionary spending. Without the luxury of having an emergency fund to fall back on, it’s important to kick that frugal mindset up a notch. After all, you need to start saving to get your emergency fund back in good health. Put your income towards necessities only and put the rest towards savings. Then figure out which luxury you still absolutely want to keep.

It’ll be tough for a little while, but as they say “this too shall pass”.

Reevaluate Your Budget

Reevaluate your budget next. If you’re lucky, you only had to spend a small chunk of your emergency fund and you still have the bulk of it left. Or maybe you had to spend it all in one go. Determine how much you need to save and use your budget to help you get there. Find areas you can reallocate and categories you can cut back on. If you don’t have a budget, then ask yourself why you don’t have one. Use this chance to motivate yourself to start one. It’s not that cumbersome to keep it updated once you get started.

Don’t ignore the power of having a budget and don’t let this opportunity slip by again.

Explore New Income Streams

Rebuilding an emergency fund can take a lot of time. Unfortunately, time is a luxury we won’t always have. Your goal is to replenish the funds as fast as possible and that can be hard to do on your regular income. Even if you make quite a bit, new streams of income will help you save more quickly since any additional income can entirely be put into your emergency fund. There are unlimited ways to make some more money. You can sell stuff in your home, pick up a second job, or do some freelance online work for others looking for help with their website.

You can even start a side business. Many successful ventures are started during tough times. It’s partly due to people losing their jobs and being forced to make something happen. Another major reason is that people who need to survive will be much more motivated to make something work out. Use the motivator wisely and you could one day even be grateful that this setback happened to you.

Learn and Improve from the Last Go Around

If you’ve built up an emergency fund and had to dip into that pot of money, one of the positives of the whole ordeal is that you now have some experience dealing with financial emergencies. You already know what it takes to start an emergency fund and add to it. You also know how to withdraw money from those accounts and use the funds for your needs. Look back on what you did and improve on the process.

Do you want to keep the funds in the same type of accounts? Did you take too much risk with that money, or not enough? Was it easy enough to access that money when you need it? Did the sum grow at all while it was in there? Did you pay too much taxes on that money? There are bound to be things you wished you did differently or better to save up even more. Take the time now while you are building up the fund to make adjustments.

Keep your goals in mind as you embark on rebuilding your emergency fund. Understand how much you need to save and how you’re going to do it. And replenish the fund quickly. You never know when the unexpected will stick again. Last but not least, aim to make it even better than your last fund.

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 AT&T DSL and U-VERSE promotion codes and promos and see if you can save more money every month from now on.

{ read the comments below or add one }

  • Beau W says:

    I’m happy with 3 months. The rest are in a CD at the credit union. If you ever want to get ahead in your money game you definitely better have a emergency stash of cash. You never know when Murphy’s Law in going to show up.

  • 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 @ 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 @ 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.

  • Allan 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 @ 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 @ 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 @ 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 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 @ says:

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

  • Travis 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 @ 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.

  • 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!

Cancel reply

Leave a Comment