Life has a way of throwing us curveballs. One week you’re cruising along, the next you’re replacing your car’s transmission or getting an unexpected bill that empties your wallet.
That’s where the emergency fund comes in. It’s a financial safety net for when life throws you those curveballs. But how much money do you need in your emergency fund? In this guide, I’ll explain why you need an emergency fund, share some tips to build one, and let you know how much to save.
Why do you need an emergency fund?
Emergency funds are there to keep you from taking on additional debt when emergencies pop up. It helps you manage unexpected events, such as a broken-down car, job loss, or needing to take time off work, without causing upheaval in your life. You can use your emergency fund and then replenish it over time once the emergency is over.
How much to save
A general rule of thumb is to keep 3 to 6 months’ worth of living expenses in an emergency fund. However, the right amount will depend on your circumstances.
Here are some factors to consider:
Your current savings and debt levels: If you don’t currently have much in savings and have a lot of debt to pay off, the idea of saving up six months of expenses might feel overwhelming. In this case, start smaller.
Aim to save the amount of one paycheck, and then grow your emergency fund to equal one month’s expenses. After that, consider focusing on paying down your debts.
Your family size: If you are single with no kids, you don’t need as big a fund as someone with a large family, even if your monthly expenses are similar. A single person tends to have more flexibility than those with dependents.
Your job security: Being laid off is one of the most significant financial emergencies you can experience. Many people base the size of their emergency fund on the security of their job.
When things are going well, a smaller fund may be appropriate. However, if your job is unstable and your industry isn’t hiring much, you’ll likely want a larger fund to cover a longer period of unemployment.
Your health: Surprise medical bills or time off work can also cause a financial emergency. If you or your family members have a condition that can cause significant medical bills, or if a condition requires large amounts of time off, you’ll need a larger-than-average emergency fund.
For example, when I was pregnant, I could only work part-time. Our emergency fund provided the missing income until I returned to work full-time.
Whether you own or rent: If you own your home, then you know things break. You’ll want to have extra funds on hand to fix the hot water tank or fridge when they fail.
If you rent, consider setting aside additional funds to cover potential rent increases. For at least a few months, so you have time to weigh your options.
Access to public transportation: If you live in an area where a car is required to get around, set aside enough money to cover any needed car repairs. However, this might not be necessary if you live in an area with good public transportation.
Tips to build your emergency fund
Saving six months’ worth of expenses is a big task. Here are some tips to help build your emergency fund.
Sell stuff: We all have things we aren’t using and could bring in extra cash. Take a moment and go through your belongings, looking for things to sell. Facebook Marketplace is a great way to get rid of clutter and make some extra cash.
Save your “extra” paycheck: If you get paid weekly or biweekly, you’ll get an extra paycheck in some months. Take advantage of this by socking away that whole extra check. This will give your emergency fund a big boost.
Tighten your budget: Try a no-spend challenge to free up some extra cash. This is where you challenge yourself to refrain from spending any money on non-essentials for a set period of time.
This means no restaurants, no impulse purchases, no drinks with friends, only necessities. You don’t need to do it forever, just to get a jump on your emergency fund.
If you aren’t already budgeting, now might be a good time to start. Having a simple budget helps ensure you are spending money where it matters. Try out Lunch Money free for 30 days and see how easy it can be!
Start a side hustle: Increasing your income is a fantastic way to save more money. Finding a way to make extra money outside of your regular job can go a long way towards building your emergency fund. Again, you don’t need to do it forever, just until you’ve reached your savings goals.
For more tips, our YouTube video on building an emergency fund in just 60 days goes even deeper!
Where to keep your emergency fund
You’ll want to keep your emergency fund in a separate savings account. Some people even use a different bank than the one where their checking account is, so they aren’t tempted to spend it.
Traditional brick-and-mortar banks often offer little to no interest, so look for a bank that offers a high-yield savings account with no fees. You may need to use an online bank for this, but transferring money to and from checking is usually fast and easy.
When to use your emergency fund
What counts as an emergency? Generally, it’s something unexpected and essential. Here are some common financial emergencies:
- Job loss
- Car repair
- Illness/ medical expenses
- Home repair
- Unexpected travel for family emergencies, such as a funeral
Routine things like oil changes or holiday gifts don’t count, so plan for those separately. However, it’s your money. If it feels like an emergency to you, that’s okay!
The bottom line
An emergency fund can give you breathing room when life doesn’t go as planned. It keeps you out of debt and reduces stress during tough times. Start small if you need to, but start. Remember that every dollar you save today is a little less panic tomorrow!
