Do You Really Need to Save Three to Six Months’ Worth of Expenses?

Quick Answer

Whether you put aside three, six or 12 months’ worth of everyday expenses in an emergency fund depends on your circumstances, including your cost of living and your income.

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It's a common refrain in personal finance: Set aside enough to cover three to six months' worth of expenses in an emergency fund. But should you heed this advice? Personal finance experts are divided on whether this is adequate to keep you financially secure in case of an emergency like a job loss or major illness.

Here, we examine the case for and against saving three to six months' worth of household expenses, and provide tips on how to boost your emergency fund.

The Case for Saving Three to Six Months' Worth of Expenses

Conventional wisdom from authorities like financial services provider American Express, investment regulator FINRA and investment brokerage Fidelity instructs us to save three to six months' worth of household expenses in an emergency fund.

"While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income and dependents, the rule of thumb is to put away at least three to six months' worth of expenses," advises Wells Fargo, one of the country's biggest banks. "This amount can seem daunting at first, but the idea is to put a small amount away each week or two to build up to that goal."

Rachel Caballero, community development manager at TruWest Credit Union in Tempe, Arizona, agrees with the three-to-six-month rule. However, she suggests putting aside even more money if you live in a one-income household.

"Fully funded emergency savings is essential for overall financial health," Caballero says.

Robert Johnson, professor of finance at Creighton University in Omaha, Nebraska, adheres to the philosophy that an emergency fund should cover at least six months' worth of everyday expenses in case you encounter one of "life's unexpected black swans," such as a job loss or a major health setback.

"Having an emergency fund is like buying insurance. If you don't suffer any losses, insurance may seem like a waste of money. But it is invaluable if you do suffer a loss," Johnson says. "The same can be said for emergency funds. If one doesn't ever suffer an emergency and have a need for those funds, it may seem like a waste."

The Case Against Saving Three to Six Months' Worth of Expenses

Personal finance expert Suze Orman suggests everyone should maintain one account with at least $400 earmarked for small-scale emergencies along with a "life plan" account containing enough cash to pay eight to 12 months' worth of everyday expenses. A "life plan" account should be used when you experience a significant unexpected event like losing a job or suffering serious injuries in a car crash, she says.

An emergency fund with three to six months' worth of expenses falls far short of what most people would need if "something goes wrong with the big picture of your life," Orman says.

Financial advisor Hagen Pruemm, owner of SIS Financial Group in Hoffman Estates, Illinois, believes you need to keep six to 12 months' worth of household expenses in an emergency fund.

"This amount will help cover everyday living expenses in case of a job loss without having to take out a loan. This is important, especially in the high-interest rate environment we are currently in," Pruemm says. "Having enough in your emergency fund will also keep you from having to sell stocks during a bear market to cover any unforeseen expenses."

For its part, the Consumer Financial Protection Bureau—the government agency responsible for protecting consumers in the financial sector—attaches no dollar figure to its guidance on how much you should stash in an emergency fund.

"The amount you need to have in an emergency savings fund depends on your situation. Think about the most common kind of unexpected expenses you've had in the past and how much they cost," the bureau advised in a blog post. "This may help you set a goal for how much you want to have set aside."

Tips for Boosting Your Emergency Fund

Patrick Yono, founder and CEO of financial planning firm Sure Life Financial in Novi, Michigan, recommends considering the following four factors to figure out how much money to keep in an emergency fund:

  1. Monthly expenses: Add up your spending from the previous 12 months, including groceries and debt payments, and divide that number by 12. This will give you an average for your monthly expenses.
  2. Current income: Is your income steady or sporadic? Do you tap into several sources of income, such as a regular paycheck or earnings from investment accounts? Determine how much money you can expect to receive every month. If your income is uneven, calculate a six-month average.
  3. Insurance: Do you have an adequate amount of coverage, including life, health, homeowners and auto insurance?
  4. Investments and debts: It's critical to balance the need for emergency savings against your investment and debt strategies. If you stash money in an emergency fund, would you lose out on earnings from a higher-interest investment? Should money that might go into an emergency fund be directed toward paying off high-interest debts?

Once you've weighed those factors, take these steps to boost your emergency savings:

  • Set a goal for how much money you'd like to store in an emergency fund.
  • Keep track of your progress so you can make adjustments if needed.
  • Consider setting up automatic deposits for your emergency account.
  • Look at putting money into a high-yield savings account.
  • Find ways to cut expenses, such as little-used streaming subscriptions, and reallocate that money for your emergency fund.
  • Participate in a savings challenge. For instance, you might try the 52-week saving challenge. In this challenge, you deposit an increasing amount of cash into your account every week, such as $1 in the first week and $2 in the second week, over the course of one year.

The Bottom Line

Regardless of whether you maintain an emergency fund with three months' or 12 months' worth of household expenses, experts emphasize the importance of saving at least some money for emergencies. This can help you avoid taking out loans, racking up charges on credit cards or pulling money out of a retirement account when an unexpected event like a job loss puts you in a financial bind.

Having a flush emergency fund can also prevent you from missing bill payments, which can lead to credit score harm. And as you build up your emergency fund, be sure you're not skipping bill payments to do so. Keep a close eye on your credit score to make sure it stays in great shape.