How Much Should I Have In An Emergency Fund? A Guide

One of the first steps to ensuring you have enough money to weather financial storms is learning how much to have in an emergency fund. That way, if you find yourself with an unexpected expense, such as a car repair or a job loss, your emergency fund is enough to cover the amount you need.

The amount needed differs depending on your expenses and other factors such as whether you earn a steady income. As such, it’s important to calculate an emergency fund amount that will work best for you.

How To Calculate Your Emergency Fund Amount

Your emergency fund amount will depend on factors such as your income, expenses, and comfort level. You can choose to save anywhere from 3 – 6 months’ worth of income or expenses. Some may choose to save more, especially if they work a job that doesn’t offer steady income, such as freelancer, small business owners and gig workers.

To calculate your expenses, take a look at your financial statements and bills, and add up the average of how much you would spend in a month. You may choose to include all of your bills, or just to include the unavoidable expenses like mortgage or rent payments, insurance and medications, and groceries.

For example, If Jordan makes $4,500 each month but spends $2,000 on gas, food, groceries, utilities and a mortgage payment, they should aim to have between $6,000 and $12,000 saved in an emergency fund. Or, they should aim to have $13,500 to $27,000 if using their salary of about $54,000 as a benchmark.

Where Should You Keep Your Emergency Savings?

There are different places to stash your emergency fund, such as:

• Traditional savings account: If you already have an account with a traditional bank, consider opening another savings account with the same one. Interest rates tend to be higher than checking accounts.
• High-yield savings account: Like a traditional savings account, the key here is accessibility. You want to keep it somewhere the cash is readily available if you need it. However, the main difference between a traditional and a high-yield savings account is that the latter tends to have much higher interest rates.
• Money market account: A money market account is similar to a savings account but it can offer higher interest rates. While the cash is readily available, it isn’t as accessible as a checking account, which could help keep you from being tempted to spend the money.

Whatever option you choose, ensure that it's separate from your other savings accounts so you’re not spending the money for other uses.

Why Is It Important To Have An Emergency Fund?

It’s important to build an emergency fund so you have a stash of cash available for any unexpected expenses. Ideally, the amount in your emergency fund can cover what you need, instead of having you scramble to get money fast. It can also help prevent you from taking out loans or relying on credit to cover costs, which can get you into more debt than you wanted.

4 Tips For Building Your Emergency Savings

Now that you have an idea of how much of an emergency fund you’ll need, take the time to see whether the amount you have is enough. If not, here are some ways you can build your emergency savings.

1. Set Up A Direct Deposit

Setting up a direct deposit from your paycheck to an emergency fund can help boost your emergency savings. Even better if you have it set up to automatically transfer a certain amount each paycheck (or other timeframe you set) so you essentially guarantee you’re saving.

2. Set Cash Aside

Any extra cash you have, such as a tax refund, annual bonus from work, or even an unexpected windfall can all go towards boosting your overall emergency savings.

3. Reevaluate Your Budget

Reevaluating your current budget can help you find ways to boost your emergency savings. For instance, you can look at where you’re currently overspending and find savings opportunities. The difference can go towards padding your emergency fund.

4. Take Up A Side Hustle

If you have the time and resources, taking up side hustle can help bring in additional income. Meaning, you can use your earnings directly toward your emergency savings account. Consider setting up direct deposit so that part or all of your earnings from the side hustle go into your emergency savings.

The Bottom Line

Creating and saving for an emergency fund doesn’t need to feel overwhelming. The first step is establishing how much you need to save, and then working slowly toward that goal. It also means carefully tracking your income and expenses so that you are aware of your financial situation. To help stay on top of your emergency fund, consider enlisting the help of apps such as RocketMoney^SM — it’s free to sign up.