Freedom Fund.
The “Oops” Account.
A “Rainy Day” Fund.
The “$h-t Hit the Fan” Account.
However you refer to it, having an emergency fund is critical to anyone’s long-term financial well-being. In a pinch, an emergency fund is a safety net that can help you avoid taking on unnecessary debt, help you weather a financial crisis, and assist you with getting back on your feet after a myriad of unexpected curve balls are thrown your way.
But How Much Do You Really Need?
For many, the answer to this question is found via the recommendations of people who are deemed to be financial “experts.” However, contrary to what you may think, a quick survey of that expert financial advice may not give you a concrete solution. In fact, it may very well confuse you to the point of giving up your quest to fund an “EF” adequately. After all, when you’re faced with multiple options, it’s sometimes difficult to make a definitive choice….
“Save six months of expenses”
“Save one year of expenses based on your bare-bones budget”
“Save $1,000 in a baby EF”
These options are all examples of expert advice that is shared daily. With all of the options out there, how are you supposed to decide which method to adhere to?
The key to navigating the waters of emergency fund information successfully is to remember that setting up, funding, and utilizing an EF is a personal decision. No matter what any expert touts as the best method for establishing an emergency fund, you need to tailor your approach to your own personal situation.
So whether it’s that you save one month, six months, or twelve months of expenses, the point is that you’re saving something. This is especially true if you’re just starting out on your own:
Save something; anything.
How To Build It
As you begin to build your emergency fund by saving anything you can, the following tips are worth remembering:
- Fund the account regularly. One of the most critical components of an emergency fund is the actual funding of the account. It needs to be automatic, as in something that you’ll do each and every week, month, or year. If you’re struggling to pay your bills or meet your obligations now, just think of how beneficial a bit of breathing room could be. Even if it’s only $25/month, something is always better than nothing in this case. Look for the best online checking accounts to get an account with good rates and fees.
- Over-estimate what you think you’ll need. One caveat to funding EFs is that people often miscalculate just how much they’ll need. If you’re going to base your account balance on a certain amount of monthly expenses, you should build in a bit of a buffer to help you navigate the inevitable visits you’ll receive from Murphy.
- Utilize separate accounts. An emergency fund should not be held in the same day-to-day checking account you use daily. It also shouldn’t be lumped in with long-term goal savings such as a house down-payment fund or future college tuition funds for your children.
- Tailor your approach to your specific situation. Once you’ve found a plan that sounds best for you, don’t forget to ensure it’s suited for your particular needs. Base your projections upon factors such as how many income streams you/your family has, medical needs, childcare costs, etc.
- Remember that EFs are fluid. Above all, remember that much like life’s circumstances, your emergency fund’s balance may always be changing. You might be required to spend some of its funds, but you should also work to replace said funds once you’ve recovered from whatever setback or challenge necessitated the use of the money. By treating your EF as a fluid entity, you’re one step closer to maintaining financial freedom.
Where Do You Put It?
Once you’ve built it, you should keep your emergency fund in a high yield savings account or money market account to work for you. You could also consider looking at CD accounts, but that does tie your money up a bit.
Check out this list of the best bank accounts:
What is your benchmark for how much you keep in your emergency fund?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Great advice to follow when setting up an emergency fund. I’m in Australia and we have it pretty easy in regards to government payments should you lose your job, especially if you have children, but you will still need some emergency money to
A) Get you through until payments kick in
B) Supplement the payments because they are nowhere near what most people are used to living on.
We had to use our emergency fund through most of 2011 and I was amazed how far we made it stretch. We have been building it up again, but you are right, it is a personal thing. I think the main thing is to start saving and saving regularly.
Great tips, especially about the delay before payments kick in – the same is true for disability or other payments as well, and you need to get by until then.
Great article, you’re so right – save anything! A % of something is better than 100% of nothing. Seeing those exact money amounts can feel like you’re not putting enough away, but setting a small amount aside is crucial 🙂 TY
Thanks, Deborah! Yes, those little bits add up over time and can be the exact thing you need to kick your motivation into overdrive in order to save even more!
I’ve read at least 3 times your monthly expenses or, if married, 6 times. It’s definitely a personal decision but bottomline, you should always have one. I have a fairly high yield savings account that I put mine in and, hopefully, I won’t need to do anything with it for a number of years so interest can be added.
That’s great that you’re utilizing a high interest account for your EF. It’s a good way to put your $$ to work for you until you need to actually use it!
I have a set $ amount I want to keep in my EF right now. It will probably go up as I get married and have kids but for now it is more than enough for me.
That’s a good way to do it – set an account minimum and stick to that. I am very similar with you on that one.
I keep a fair amount available for emergencies. I feel much more comfortable when I have access to funds as emergencies always come up.
You never know when an emergency can happen, so it’s nice to have a little something ready just in case. I feel more comfortable knowing that I have a rainy day fund.
This is how I started my EF too! Just start doing it, and it will build up quite nicely if you are focused. I made separate accounts and started off with the EF, and it motivated me to start saving for other things!
Do you have multiple accounts for multiple goals? Or do you keep it in one account?
I don’t have an actual silo-ed emergency fund, but I do have a comfortable amount of savings that I wouldn’t panic or be in deep trouble if I lost my job tomorrow or had to help pay for a family medical bill or something. I think having at least 6 months of living expenses in savings is a good starting goal.
I agree with six months as a minimum. Depending on how safe your job is, you may want to go up to 9 or 12 months.
I view it as a sliding-scale type of measurement: it all depends on your particular set of circumstances. A college student who goes away to school or lives at home will need a small fund as they don’t yet have a large number of regular expenses. If you are married with kids, the size will need to be greater since the number and amount of regular expenses is greater. If you have a history of medical trouble, regardless of size of family the e-fund will need to be substantial to cover loss or income/insurance. There can be no set blanket amount that applies to everyone as a whole. Each person/family needs to assess their situation on a micro level and do what works best for their needs.
Great point – a college student’s reserve will be much smaller than a families. The bottom line is that you need to look at your own expenses and decide for yourself.
For right now, my goal is to have six months worth of living expense in my emergency fund. Depending on what life stage I’m at, I’ll proabably change how I determine my EF bench mark.
That’s a great starting point, and you should continue to base it on your needs going forward.
Really interested in this topic as we are building alerts/metrics into Planwise and the emergency fund / buffer .. and how much it should be seems to be something that varies a bit between people. Even if expressed as a ratio relative to income or expenses. Would love to hear the specific amount or ratio that readers use for their emergency funds!
I think you could calculate it as 600% of expenses per month – that would give you a six month emergency fund, which many readers have said is their goal.
Enjoyed the article! I always went with 3 months but after purchasing a house I went up to 6 months. Need some extra $$$’s just in case something goes down like plumbing. The best advice I ever received, and it was in this article, was to start by saving a little at a time monthly. Treat it like a savings account.
That is great advice, and it’s smart to up your rainy day fund when you get a house. Many lenders now want to see a 6 month reserve when approving a loan.
Wow! .. I did not know that, such a change from only a few years back
I do not need an emergency fund right now, but when I think about what six months of wages could earn if invested I know that I am going to just have an open line of credit in case I need money fast (job loss, illness, big repair).
At the very least the line of credit will tide me over until I could cash out any additional investments I need to pay for the emergency.
Wow, running it lean. Investments do count, but what if you needed to pay for a big repair, and it’s a Saturday. Best case is you sell your investments on Monday, and it settles by Wednesday. That means you won’t get your car back for almost a week. Credit works, but be careful with it!