How much money you should have in an emergency fund

Having cash available for emergencies is critical. Without it, a sudden medical bill, job loss, or other unexpected change could send your finances into upheaval. You might even need to take out a costly loan or rack up credit card debt just to get by.

Unfortunately, these scenarios are more common than you might think. Only about two-thirds of Americans say they can cover an unexpected $400 expense in cash, according to the Federal Reserve. 

Do you have a flush emergency fund to weather potential storms? If not, here’s what you need to know.

What is an emergency fund? 

emergency fund

Emergency funds are savings you set aside for unexpected costs — like home repairs or medical bills, for example.  

“It is literally just money that you set aside that you would have available in an emergency,” says  Ashlee Walton, a CFP® professional at James Investment Research. “If no other dollars are available, these funds could be used to pay for unexpected expenses such as car repairs or a hot water heater or to pay bills if you suddenly lost your job or had a medical emergency.”

Emergency funds can ease financial stress when unforeseen costs arise. They can also help you avoid the unwanted consequences of borrowing money or, in dire scenarios, not paying your bills altogether.

As Walton explains, “With no emergency savings, you could be stuck paying high fees to borrow money, taking costly distributions from retirement accounts, or worse, unable to pay expenses and potentially losing your home, car, or other assets.”

Read also: How to write SMS seeking financial assistance

What is an emergency fund for? 

An emergency fund should be used for unforeseeable expenses that are important to pay off. This can be a mortgage or car payment, or some other expense that is of equal importance. You should dip into an emergency fund only if you have to — if you’ve lost your job or something else causes a disruption in your income.

“Emergency funds should only be used for needs, not wants,” says Jay Zigmont, a CFP® professional, founder of Live, Learn, Plan, and a Registered Investment Advisor based in Mississippi. “Needs are things that you must pay for or must do, such as repairing the roof on your house. A kitchen remodel is a want, not a need. New tires for your car when the others are bald is a need; a new car is a want.”

Having a flush emergency fund is also important in uncertain economic times, Zigmont says. These days, with inflation, the pandemic, and other economic factors at work, there’s no telling when cash reserves might come in handy.

“If there is anything that the last two years taught us, it is that emergencies happen,” Zigmont says. “Emergencies are often out of our control and are more than just the loss of a job. The key is to have a cushion when bad times hit as part of our everyday life.

How much money should you have in an emergency fund?

Look at what you spend

Most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months’ worth of living expenses.

Start by estimating your costs for critical expenses, such as:

  • Housing.
  • Food.
  • Health care (including insurance).
  • Utilities.
  • Transportation.
  • Personal expenses.
  • Debt.

You don’t need to include expenses for anything you’d cut from your budget in the event of a job loss or major catastrophe. For example:

  • Entertainment.
  • Dining out.
  • Nonessential shopping.
  • Vacations.
  • Savings for a second home, college, or other goals.

Decide if you need to save more

Putting aside 3 to 6 months’ worth of expenses is a good rule of thumb, but sometimes it’s not enough.

If you’re able, you might want to think about expanding your emergency savings.

Here are some scenarios where having more in your savings could benefit you:

  • During a recession (when unemployment rates are higher and the length of unemployment is often longer).
  • If you’re in a high-risk industry where layoffs are common.
  • If your income isn’t steady.
  • If you’re retired (and most of your money is in more-volatile stock and bond investments).

Read also: 14 ways to overcome financial challenges in your business

Something is better than nothing

Don’t think you can save enough? Don’t panic. You can build up to it by stashing away smaller amounts on a regular basis, like every week or every paycheck. If you keep it up, over time you’ll eventually meet your goal.

The important thing is that you’ve started saving something.

For instance, let’s say you set aside $25 a week in an emergency fund. At the end of 2 years, you could have $2,600 saved. Increase that amount to $50 a week and your savings could grow to $5,200. Make it $75 a week and you’ll see an even larger amount saved—$7,800.

Remember to make use of your share button. Ask your questions through the comments section and please follow us on our Official instagram and Facebook page.