An emergency fund is money you set aside for urgent, unexpected expenses, such as car repairs, medical emergencies, or home repairs. It could help you manage the financial burden of an emergency without having to take out a personal loan, incurring credit card debt or borrowing money from friends and family.
But how much do you need for an emergency fund? Let’s look into ways to determine how much to save.
Starting your emergency fund
The primary goal of an emergency fund is to cover significant and urgent unexpected expenses, like a car repair or a leaky roof. So, your first savings goal should be to cover an expense of this size.
You can start by saving a certain amount from every paycheck or by the end of each month. Regularly depositing a small sum of money, no matter what amount, into a savings account specifically for emergencies can help you better handle unexpected financial expenses.
Keep in mind, some banks offer automatic savings tools to help you build better savings habits. Consider using these to easily build savings into your monthly budget.
Continuing your emergency fund
The next goal for your emergency fund should be saving for a larger financial setback, such as job loss. This is typically 4—6 months of living expenses, but this number can vary. This savings goal will depend on various factors, including your annual income and how much you can realistically set aside after your monthly bills are paid.
To get started, calculate what you spend on groceries, rent, utilities and other essentials every month. Multiply that number by how many months of emergency savings you want. That’s the number to work towards. If the number feels unrealistic for your financial situation, figure out what is reasonable for you. Having some kind of cushion is better than having none at all.
Where should you keep your emergency fund?
Your emergency fund should be easily accessible — you never know when you’ll need it. Consider keeping your emergency fund in a savings account or split between a checking and a savings account. Some people like to have a secondary savings account just for this purpose.
No matter what kind of savings account you use, it can be helpful to split your paycheck so a portion of it goes directly into your emergency fund. Alternatively, you may want to set up a regular automatic debit from your checking account to your emergency fund.
Keep in mind, it’s usually not a good idea to tie up your emergency fund in CDs, or similar accounts where you won’t be able to access the money for a specific period without paying a penalty.
