How to Find the Right Emergency Fund Formula For You

By Susan Shain
September 11, 2020

What would you do if your car needed an unexpected $500 repair? Or your heat stopped working in the middle of winter? 

If you’re like many Americans, you’d put the bill on a credit card, or borrow money from friends and family. But, in an ideal world, you’d pull the money from a savings account—created specifically for situations like this. 

Yep, you guessed it: We’re talking about emergency funds. Though you probably know it’s wise to have one, you may not know how much to stash away. And, before you get serious about setting one up, it’s helpful to have an end goal in mind. 

Here are several strategies for figuring out how much to save in your emergency fund. 

  1. What is an emergency fund?
  2. How much should I save?
  3. What’s the right amount for your emergency fund?

What is an emergency fund?

First things first: An emergency fund is an account you create for the purpose of covering unexpected expenses. 

When starting an emergency fund, some people open a savings account at an external bank, believing they’ll be less likely to touch the money unless they truly need it. Others open a second savings account at their regular bank, so they’ll have quicker access to the money when the time comes. 

And once you’ve set it up, avoid using the money unless it’s, well, an emergency! While we’re sure you know, here are 5 common reasons to tap into your emergency fund

including surprise medical bills, car repairs, or living expenses after a job loss. 

☝️ Whichever route you choose, make sure you’re parking these funds in a high-yield savings account to get the most out of your money. 

How much should I save?

Now for the million dollar question: How much should you save in your emergency fund? Though there’s no one-size-fits-all answer—there are ways to find the right amount for you.

Set aside 3-6 months worth of living expenses

As a general rule of thumb, many financial experts recommend setting aside 3-6 months worth of living expenses. So if you generally spend $2,000 per month on rent, utilities, food, gas, healthcare, and other necessities, you should try to save between $6,000 and $12,000. From our perspective, this may not be the best starting point for everyone, especially considering the lower-end is still a super-high amount.

Aim to save $1,000 and go from there

The financial guru Dave Ramsey is an ardent supporter of emergency funds—so ardent, in fact, that he lists “Save $1,000 for your starter emergency fund” as No. 1 of his seven “Baby Steps” for financial security

While $1,000 is still a big number, it’s a more achievable one. If you manage to stash away $100 per month, for example, you’ll reach $1,000 in less than a year. And, by that time, one surprise bill won’t be able to throw your whole budget off track. 

To reach this $1,000 savings goal as quickly as possible, we recommend automating your deposits. For example, you could funnel $25 from your checking account to your emergency fund each week. By doing so, you’ll “pay yourself first”—and remove one major psychological roadblock to saving. 

You can also automate your emergency fund in other ways. For example, If you have a Chime Visa debit card, you can round up each purchase to the nearest dollar and deposit the spare change into your savings account. It might not sound like much, but the little things add up over time. Lastly, you can set up an automatic transfer so that a percentage of paycheck deposits into your savings account each time you get paid.

Use the 3/6/9 rule

As we mentioned above, saving 3-6 months worth of expenses is an awfully big range. That’s why some people use the 3/6/9 rule to figure out how much they should save in their emergency funds. 

Here’s a basic overview of the rule’s guidance: 

  • Save three months of expenses if: You have a steady paycheck, no mortgage or dependents, and could move in with relatives if things got dire. 
  • Save six months of expenses if: You and your partner both have steady paychecks, as well as dependents or a mortgage.
  • Save nine months of expenses if: You have an irregular income (cough, freelance, cough) or are the sole earner in your family. 

Though this process isn’t bulletproof, it’s a good way to think about emergency funds: Your amount should be based on the stability of your income, the number of people depending on you, and the support you receive from others. 

Try an emergency fund calculator 

Not a ballpark kind of person? Then you might be interested in determining an exact goal for your emergency fund. 

Luckily, Money Under 30 has a calculator that makes it easy. It assesses your monthly expenses and current savings, as well as how long it might take to find a new job if you lost yours. 

One thing to note: The calculator spits out large numbers, as it’s anticipating a total loss of income rather than a one-time emergency. While its totals are a great goal to strive for, don’t let them intimidate you! Start with small steps, such as saving $1,000, and slowly build your emergency fund over time. 

What’s the right amount for your emergency fund?

Starting an emergency fund can feel like an overwhelming process. Not only are the numbers big (so big!), but it’s hard to know exactly how much to save. 

If you’re nodding your head in agreement, here’s some parting advice:

– Don’t worry about the amount too much, just start saving. 

– Put whatever you can spare—whether it’s $5 or $10 or $25 a week — into a high-yield savings account. 

– Automate transfers so they occur each and every week, no matter what else is happening in your life. 

The bottom line: No matter how long it takes, if you plan to build up your emergency fund now, you’ll be that much closer to staying ahead of the unexpected.

Susan Shain is a freelance personal finance writer. She had personal finance stories published in The New York Times, Lifehacker, and MarketWatch. Susan was previously on staff at The Penny Hoarder and Student Loan Hero, and has written content for a variety of Fortune 100 companies.

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