How Much Should You Have in an Emergency Fund?

How Much Emergency Savings Do You Need?

One rule of thumb is to sock away three to six months' worth of basic living expenses in your emergency fund. That's for only the essentials: rent or mortgage payments, bills, basic groceries, child care and the like.

If you have inconsistent income, it's wise to aim for a larger emergency fund. If you're a freelancer, contractor or someone whose income varies from month to month, for example, you may want to set aside more. The same is true if you're the sole earner for multiple dependents.

Tip: If saving multiple months' worth of basic expenses sounds overwhelming, start with a savings goal that works for you. Aiming to put $1,000 or even $500 in emergency savings can be a strong jumping-off point.

Calculate Your Emergency Fund Goal

Setting a goal for your emergency fund is straightforward. Here's how to start.

1. Find Your Essential Spending

To calculate how much to put in your emergency fund, you'll need to know your baseline, necessary expenses.

Start by going through your bank account and credit card statements. Looking back over several months, tally up your spending on bare-bones essentials only. Here are some things to include:

• Your monthly rent or mortgage payment
• Utilities and other bills
• Basic food and toiletries
• Child care
• Transportation, such as gasoline or bus fare
• Health care and medical bills
• Essential pet care and veterinary bills
• Minimum monthly payments on your credit card and loan payments

2. Take the Average of Your Essential Spending

To find a good average for your nonnegotiable spending, look back over at least three months. Come up with a sum for each expense. Then, add those months up and divide by the number of months you reviewed to find your average monthly bare-bones spending for each regular expense.

3. Multiply Your Average by the Months You'll Save

Last, multiply your average essential monthly spending by the number of months you want in your fund. If your ultimate goal is to save three to six months' worth of expenses, you might find it beneficial to calculate both numbers. Then, you could aim to save three months by the end of the year, and six months by the end of the next year.

Emergency Fund Savings Goal Example

Let's say you want to save four months' worth of essentials in your fund.

1. Review your bank statements. Look at the past three months' spending on essentials like rent, food, your car payment and bills. For this example, let's say your expenses were $2,800 one month, $3,300 the next month and $2,900 in the third month.
2. Find the average amount of your monthly expenses. Add your expenses from the past three months to get $9,000. Then, divide by three (the number of months you reviewed) to find your average monthly spending: $9,000 / 3 = $3,000.
3. Multiply your average monthly expenses by four. With an average monthly spending of $3,000 and a desire to save four months' worth of expenses in your emergency fund, your savings goal would be $3,000 x 4 = $12,000.

This is just an example, and your income, expenses and number of months covered in your emergency fund will vary. If your income is inconsistent, you may want to average your expenses over a longer period of time, such as six months to a year. Be sure to also account for infrequent expenses such as tax payments and car registration.

Best Places to Keep Your Emergency Fund

The best place to keep your emergency fund is somewhere you can easily access it when you need it, and where it will earn interest. Here are two suggestions for the best place to keep your emergency savings.

• High-yield savings account: One strong choice is a high-yield savings account, where you'll have easy access to your funds but still earn more interest than with the average savings account.
• Money market account: A money market account earns interest, similar to a savings account, but also often comes with the ability to use a limited number of check and debit card transactions each month.

To ensure you're funding your emergency savings goal consistently, set up automatic transfers from your checking into savings accounts each payday. Come up with a weekly or biweekly savings amount that works for you.

Tip: Wherever you keep your emergency fund, try to resist any temptation to tap into the funds outside of a true emergency. You'll want to make sure the money is there should you ever truly need it.

The Bottom Line

Building an emergency fund is foundational to achieving financial security. That money is there to turn what could otherwise be a worst-case scenario into a manageable crisis. A job loss or large repair bill is painful no matter what, but avoiding debt can help soften the financial blow.

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