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You may have heard that creating an emergency fund is important—but you may not know what an emergency fund is for or how much you should save. For your convenience, we’ve created an emergency fund calculator to help you find a savings target.
Simply put, an emergency fund is a stockpile of money that you have set aside to be able to use in a difficult financial situation—if you lose your job, for example.
Many financial experts recommend saving three to six months’ worth of necessary expenses, which will give you a cushion for many financial setbacks.
Use our calculator below to figure out how much you should save to have a three- or six-month emergency fund. Keep reading to learn more about how an emergency fund can benefit you and some tips for how to build up your emergency fund.
What is an emergency fund?
An emergency fund is made up of money you set aside to prepare for financial setbacks and surprises. Having money just for emergencies means that you’ll be more prepared for any of the following situations:
- Unexpected car or home repairs
- Unplanned travel for a funeral or another personal reason
- Medical emergency
- Job loss
An emergency fund is most helpful if you set it aside until you absolutely need it. If you lose your job and have no income for a period of time, your emergency fund can help you weather the financial storm until you’re able to get back on your feet.
In general, financial surprises aren’t really surprising: chances are, most of us will have an unwanted large expense come up every now and then. The best way to make sure that financial surprises don’t become financial setbacks is to start preparing your emergency fund now.
How much should you save in your emergency fund?
As a general rule, many financial experts recommend keeping three to six months’ worth of expenses tucked away in your emergency fund. The exact dollar amount will vary from person to person, but the idea is the same: if you have at least three months’ worth of expenses saved, you can survive three months without any income.
To come up with the amount you need, you’ll want to consider the necessary expenses you have each month—the things you absolutely cannot live without. For example:
- Housing payments, like rent or mortgage
- Groceries and food
- Utilities, like electricity and water
- Transportation expenses
- Medical costs
- Insurance for your home or car
- Debt payments for loans or credit cards
You may have other necessary expenses that you can also include. After you total up all of your fixed monthly expenses, multiply by three or six to determine how much you should save. Alternatively, you can use our calculator above to easily find an estimate for your target emergency fund savings.
Some people choose to save 12 months’ worth of expenses or more, especially in the following situations:
- Your income is sporadic or you work in a field where layoffs are common
- You have dependents
- The economy is in a period of uncertainty
Ultimately, the amount you choose to save in your emergency fund is up to you. If possible, consult with a financial advisor to help determine a good benchmark. And no matter what, start saving now. Any amount you save can be the seed of an emergency fund that helps you when you need it most.
Where should you keep your emergency fund?
You’ll want to make sure you store your emergency fund in an account that is easy to access, like a savings account with a bank or credit union. Avoid putting your emergency fund in an investment account, as your investment could lose value when you need the money most.
Some people keep their emergency fund in a completely separate bank account—that makes it less likely that you’ll use the money unless you absolutely need it. Some banks now offer savings “buckets,” which enable you to segment your money within a single account. For example, you could have a savings account with $8,000, with some set aside for an upcoming vacation and the rest for your emergency fund.
A savings account from a bank or credit union is an ideal place for your emergency fund because it will generate a small amount of interest, it is backed by federal deposit insurance and it will be easy to withdraw money from during a financial crisis.
How should you get started with saving?
An emergency fund is an important part of your financial picture—and you’ll likely feel more comfortable once you’ve got three to six months’ worth of expenses set aside.
However, finding ways to save can be difficult depending on your budget, so consider some of the following steps on your journey to building up an emergency fund.
- Start by looking at your current spending. Many of your expenses—like housing and groceries—are nonnegotiable. Other spending, though, could be cut back to offer an opportunity to save. Setting aside 5 to 10 percent of your paycheck every month toward saving goals can be a great start.
- Don’t forget about high-interest debt. Although saving for an emergency fund is a great goal, you need to balance it against other financial priorities. If you have high-interest debt from credit cards or loans, ensure you’re also making payments to drive down that principal.
- Invest for the future. In addition to an emergency fund, you’ll want to consider setting up a retirement account, like a 401(k) or IRA. These accounts help you save for retirement—often with tax advantages and compounding interest.
Building up a healthy financial picture also involves responsible use of credit cards and loans. If you haven’t checked in on your credit recently, it would be a good idea to get a copy of your credit report. Take some time to evaluate your accounts and balances—and also make sure that your report is free of inaccurate or fraudulent information.
If you’re struggling to stay on track with your credit or need help raising your score, consider working with a credit repair company to find your financial groove.
Methodology
Our emergency fund calculator estimates how much money you’d need to manage three to six months without income by determining your existing monthly required expenses. Additionally, we calculate the time it would take you to fully fund your emergency savings by considering how much you save each month and how much you already have saved. This calculator cannot account for all financial scenarios, so you may consider working with a financial professional to determine your emergency fund needs.
