How Much Should You Keep in an Emergency Fund?

Jenius Bank Team1/16/2024 • Updated 12/6/2024

Woman calling for help in front of a damaged car.

Don’t be caught off guard when a disaster hits. Financial emergencies can pop up at any time without warning. When they do, they could take a serious toll on your savings account balance if you’re not prepared. While rebuilding your savings is possible, it’s far better to be prepared for emergencies before they happen. Building an emergency fund may help you do just that.

Key Takeaways

Emergency funds may help you cover unexpected expenses or provide you with money for essential costs if you temporarily lose your income.
The amount you should consider saving depends on your situation, income, lifestyle, and needs.
Having between three and six months of living expenses is a good goal for the average person, but saving any amount could still help reduce your financial stress during periods of uncertainty.

Emergency Fund Overview

Think of your emergency fund as a financial cushion that may help you get through times of financial uncertainty. It’s money you could use to pay for large, unexpected expenses, like a hospital bill. It’s most commonly used to help pay for essential expenses, like housing, insurance, and food, if you lose your job.The fund isn’t meant to replace your normal savings. Instead, it’s a specific type of savings that you earmark for emergencies, giving you a cash source that may help you handle the unexpected.Having an emergency fund may help provide peace of mind, but how much should you save? That’s where many people get stuck. Let’s take a closer look at what you might aim for and why it matters.

How Much Should You Save in Your Emergency Fund?

Did you know that 72% of U.S. adults believe they have enough saved up to cover emergency expenses?¹ That’s good news, but it still means that 28% of adults don’t feel comfortable with their emergency savings. Without emergency savings in place, you may end up reaching for your credit card just to cover the essentials. And if you carry a balance on that card, you risk going into debt, racking up high-interest charges, and possibly hurting your credit score, all while making the stress of your emergency even worse.While any amount of emergency savings may help you achieve and maintain financial wellness, the more you save, the better. So, how much should you have saved up? It depends on your personal needs. Let’s take a closer look at how to decide your ideal emergency savings target.

Determine Your Emergency Savings Target

Every person is unique, and the amount of money they need to set aside depends on the costs they have, the number of dependents they have, and their income. But there are a few techniques you could use to figure out how much you want to save. You may choose to base your goal on your average expenses, a percentage of your income, or the emergency type. There’s no right or wrong goal-setting method, but one may work better for you than another.

Choosing a Strategy

Say you’re worried about replacing your income if you were suddenly laid off. This could help you avoid having to take out a personal loan or rely on credit cards to make ends meet if your finances get rough. You could use the average expense or the percentage of income strategy to create a savings target.

Average Expense Method: Total up your essential costs for the month, including housing, food, healthcare, utilities, transportation, and minimum debt payments.²
Percentage of Income: Estimate the percentage of your take-home income that goes toward essential expenses.

Once you choose your approach, you need to decide how long you want your emergency fund to be able to support you. Most finance professionals recommend saving three to six months’ worth of living expenses. If you use one of the above methods, multiply the total by the number of months you want the funds to last to get your target amount. That said saving more may be a good idea, especially if you’re concerned about the following:

Living through a recession
Losing your job because layoffs are common in your industry
Not having a steady income
Just wanting to have more funds on hand

Ultimately, it’s up to you to determine how much you want to save.

Plan for Specific Emergencies

Some people choose to set their emergency fund target based on specific emergencies. If you choose this approach, consider which emergencies are most likely to happen in your area. For example, say you live in a flood-prone area and don’t have flood insurance, you may want to save enough to help cover the cost of repairs. Find estimates for most major emergencies online to help you figure out how much you should save.

Using and Rebuilding Your Emergency Fund

Remember, your emergency savings are there to help you during times of financial strain. If you’re experiencing an emergency, use your savings to help you cover your expenses, even if you haven’t hit your goal.³ You could always rebuild your savings once the emergency passes. Consider revisiting your budget and reallocating funds from one goal, like a vacation, toward your emergency fund rebuild. Keep contributing until it’s replenished. Then you can go back to saving for that vacation!

Where to Keep Your Emergency Fund

Though you could keep your emergency fund in your existing savings account, doing so may make it difficult to track your progress and earmark funds just for emergencies (and not an impulse purchase).Instead, consider opening a dedicated savings account for your emergency fund and looking for a high-yield savings account (HYSA). Rates on all savings accounts are represented as Annual Percentage Yield (APY) which tells you how much your savings could earn over the course of the compounding period. A high-yield account, by definition, has an APY above the national average, and that means that your emergency fund could grow even faster over time.As you start shopping for a savings account, do your due diligence. Make sure the financial institution you go with is either FDIC insured or NCUA insured, as this helps protect your money up to the established limits of $250,000 per depositor, per account type, per institution.

Final Thoughts

Creating an emergency fund could be a great way to prepare yourself and your finances for life’s unexpected events. Any amount of savings may help you avoid going into debt during an emergency. However, the best way to maximize your savings is to choose an account that earns competitive rates and could help you grow your money on autopilot. Check out our guide to learn how to choose a great savings account.

Saving & CheckingFinancial Wellness

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