An emergency fund consists of savings you set aside to cover unexpected expenses or support you if your income takes a hit.
While you hope you’ll never have to use the money in your emergency fund, you’ll be grateful that you saved it. But how much do you need to keep in your emergency fund? Here’s how to find your savings goal number, plus where to stash your funds.
How much emergency savings do you need?
The amount of emergency savings you need depends on your personal financial situation, including your income stability, expenses and the needs of your dependents. There are some general rules of thumb you can apply to come up with a savings goal that works for you.
Many experts recommend setting aside enough money to cover three to six months’ worth of basic living expenses. That’s only the essentials: rent or mortgage payments, bills, basic groceries, child care and the like.
You might choose to save more than that in some circumstances. For example, if you’re a freelancer, contractor or someone whose income varies from month to month, you might aim higher. The same could be true if you’re the sole earner for multiple dependents.
But 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.
How to calculate how much to put in your emergency fund
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
To find a good average for your non-negotiable spending, be sure to 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 minimum spending.
Last, multiply your average essential monthly spending by the number of months you want in your fund.
Best places to keep your emergency fund
The best place to keep your emergency fund is somewhere that you can easily access it when you need it, and where it will earn some interest. One choice is a high-yield savings account, where you’ll have good liquidity but still earn more interest than the average savings account.
To ensure you’re funding your emergency savings goal consistently, you can set up automatic transfers from checking into savings each payday. Come up with a weekly or biweekly savings amount that works for you.
Let your money grow in your high-yield savings account or money market account so that it’s there for you should you ever need it in an emergency.
For more information on budgeting, see the following articles: