Is My Emergency Fund Too Big?

Quick Answer

Your emergency fund could be too big if it exceeds three to six months’ worth of expenses. That said, everyone has a different financial picture. Some people keep up to a year’s worth of savings in an emergency fund, while others might find that sticking to closer to three months frees them up to pursue other goals.

Woman calculating the necessary size of her emergency fund

Are you wondering "is my emergency fund too big?" While feeling extra financially secure has clear merits, you could actually be taking a loss if you're overfunding your emergency fund and neglecting other financial goals.

Here's how to find out whether your emergency fund is too big, and what to do with your money if you have too much in savings.

The Dangers of Keeping Too Much in Savings

While having a flush emergency fund is a great source of security, overfunding your savings account can be an overall loss for your finances. Here's why:

  • There's an opportunity cost. Even if you're keeping your money in a high-yield savings account, the returns you'll make on your savings are typically low compared with the returns you could be seeing if you took on some risk. If you completely forgo investing in the stock market in order to keep your savings liquid, you'll lose an opportunity to grow your money over time.
  • Money in savings depreciates. If the interest your savings is earning is less than the rate of inflation, the money you have in savings actually loses buying power over time. For example, the rate of inflation for the one-year period ending February 2023 was 6%. The average savings account deposit rate currently hangs at only around 0.37%.
  • You could exceed the $250,000 insurance amount. In the event of a bank failure, the Federal Deposit Insurance Corporation (FDIC) covers money you've deposited in an insured bank account and interest you've earned, but only up to $250,000 per account holder (so $500,000 if you have a joint account with your spouse). If you keep your money at a credit union, your deposits are insured by the National Credit Union Administration (NCUA) for the same amount. Keeping any more than that in one bank account is taking on a risk.

How Large Should an Emergency Fund Be?

There isn't one right answer to how much you should keep in emergency savings. Everyone has a unique financial situation, and there are a lot of factors that go into deciding how much you need to set aside for emergencies. Here are some things to consider.

You could consider using a rule of thumb for how much to set aside for emergencies. One common rule of thumb suggested by financial experts is to keep three to six months' worth of basic expenses in emergency savings. The idea is that this will provide an adequate pad if you lose your income or experience a large expense.

To determine how much three to six months' worth of expenses is for you, tally up your bare-bones monthly expenses only. Don't include discretionary spending, which you would have to cut in a true emergency. Multiply that number by the number of months you want to have in your stash.

But it's possible this range won't be the right number for you. For some, a six-month emergency fund may feel like more than is necessary, and you may choose to stick with a smaller, flat amount, such as $5,000. For others, a 12-month emergency fund could feel like a secure number.

Here are some cases where you might aim to save more in your emergency fund:

  • Your income is used to support multiple members of your household and is solely used for covering housing, transportation and other basic necessities.
  • You're worried about an economic recession and would feel more secure with more savings.
  • You have an unpredictable or variable income, such as if you're a freelancer or contractor.
  • You're worried about job security, such as if you're in a field with frequent layoffs.

What to Do With Money After Fully Funding Your Emergency Fund

If you've fully funded your emergency fund and want to keep the saving momentum going, here are some ideas for money goals you can target next:

  • Pay off debt. Once you have ample emergency savings, a great next move is to direct any extra money toward paying off high-interest debts. If you're carrying credit card debt or loan balances with a rate of around 8% or higher, prioritize paying them off first.
  • Invest for retirement. The key to saving enough money to retire is to save early and save often. Even if you're already saving for retirement, consider upping your investments by a couple percentage points. If you've been aggressively building your emergency savings and are now done with that goal, you may not miss the extra money you direct toward a 401(k) or individual retirement account (IRA).
  • Save for a down payment on a house. If your emergency fund is flush and you're in the habit of saving for retirement, the next goal you might consider tackling (if you aren't already a homeowner) is saving up to buy a house. Try directing the same amount you've been directing toward emergency savings into a separate down payment savings account.
  • Create an education savings fund. Whether you're planning to send kids to college one day or think you might like to go back to school in the future, consider funneling some cash into a 529 college savings plan. Money you put in these accounts grows tax-free, and you can use it to pay for your own college expenses or for those of a beneficiary—even if you aren't related to them.
  • Put money into sinking funds. Sinking funds are mini savings funds that you "sink" cash into each paycheck. Some people use sinking funds to reach specific goals, save ahead for their bills for the year, prepare for holiday shopping or "prepay" themselves for discretionary purchases down the line.
  • Build a budget buffer. Budgets are a thing you set, try to stick with and then, often, have to flex to accommodate your actual spending. Sinking cash into a savings account meant to specifically iron out variations in your budget can help keep things neat.
  • Create a vacation and wedding savings fund. Saving for essentials and wealth-building opportunities matters, but don't overlook the opportunity to save for things you simply want. Maybe that looks like setting aside cash for a trip overseas next year, having cash set aside for next wedding season or even creating a fund for your dream wedding. Cheers!

The Bottom Line

While there isn't a right answer to the question of how much you should save in your emergency fund, you want to make sure you're saving enough to feel fully secure in the event of a loss of income or large expense.

On the other hand, there can be such a thing as too much financial security if that means not allowing for any risk in your saving and investing. If you're keeping all your money in savings or tied up in low-risk investments such as bonds, you're missing out on the potential to grow your money faster and have a bigger nest egg for retirement.

To reach those large goals on the horizon—namely, retirement—you'll need to invest your cash to let factors such as compound interest work their magic on your hard-saved dollars. Learn more about investing to get the ball rolling.