Is Your Emergency Fund Enough? Calculate the Ideal Amount Based on Income or Expenses

An emergency fund can help you weather unexpected expenses or a job loss, but most people don’t have enough saved. Many financial experts recommend having three to six months of income saved; others recommend more or sometimes even less.

Here’s how to calculate how much you need in your emergency fund using both methods.

Key Takeaways

• An emergency fund can help you deal with financial shocks, such as unexpected expenses or a job loss, without taking on debt.
• Keep emergency savings in a highly liquid, interest-earning account such as a high-yield savings account.
• Some financial experts recommend saving three to six months of income, while others suggest 12 to 18 months’ worth of living expenses.
• Even if you can’t save as much as experts recommend, any emergency savings is better than none when faced with a financial shock.

Why You Need an Emergency Fund

An emergency fund is made up of cash or other highly liquid funds that you can access to deal with financial surprises. These surprises are usually:

• Spending shocks: Large and unexpected expenses, such as a medical bill or home repair
• Income shocks: Sudden loss of income after being furloughed or laid off

Without an emergency fund, you may have to handle an emergency by putting expenses on high-interest credit cards or withdrawing funds from a retirement account. If you have an emergency fund, however, you can more easily weather unexpected financial shocks without taking on debt.

Catherine Valega, a certified financial planner (CFP) and founder of Green Bee Advisory, suggests that clients “have [emergency] funds work for them in higher-yielding liquid alternatives.”

This includes money market funds, certificates of deposit (CDs), high-yield savings accounts, or U.S. Treasury bills. Using these types of savings vehicles allows your money to earn interest while remaining quickly accessible in an emergency.

How Much to Save in Your Emergency Fund

Many financial experts recommend having an emergency fund worth three to six months of your household income. This amount gives you a cushion for several months of unemployment should you lose your job or funds to cover unexpected expenses.

Valega, who describes herself as “more conservative than most other advisors,” advises clients to have a few months of “working capital” in an account like a checking account and plan to pay bills from there. “For their emergency savings, 12–18 months of living expenses,” she says. “Once you have those 12–18 months [of] living expenses saved, then we work on investing and paying off debt.”

Emergency Fund Calculation

“Living expenses” is different than income. You might have an income of $7,000 per month but only need $5,000 to cover your monthly expenses like housing, food, utilities, child care, transportation, debt repayment, and insurance, with the rest likely going toward investments or discretionary spending.

To calculate how much you should have in an emergency fund based on income, start with your monthly take-home pay. Using the above example:

$7,000 × 3 months = $21,000

$7,000 × 6 months = $42,000

An emergency fund with three to six months of income would have $21,000 to $42,000 in it. However, if you’re unable to save that amount, you may be able to get away with a smaller cushion of savings.

In a J.P. Morgan Report, researchers estimate that workers making between $50,000 and $100,000 would need just four to ten weeks worth of net income to manage spending and income shocks.

Yet a more cautious saver could use Valega’s recommendation and plan emergency savings based on more months of living expenses. Using the above example again:

$5,000 × 12 months = $60,000

$5,000 × 18 months = $90,000

An emergency fund with 12 to 18 months of living expenses would have $60,000–$90,000 in it.

This level of saving might feel daunting. In that case, it can feel helpful to think of emergency savings as a goal you’re always working toward. If you consistently set aside money in an emergency fund, even a small amount, eventually you will build up your savings. Even $50 a month will add up to $1,000 in emergency savings in less than two years.

The Bottom Line

Financial experts often have different recommendations for how much to keep in an emergency fund. Some advisors suggest three to six months of income; a more conservative approach would be 12 to 18 months of living expenses. However much you save, hold it in an accessible, interest-bearing account such as a high-yield savings account.

Even if you can’t save as much as financial experts recommend, it’s still worth starting small, because having some money saved for emergencies is better than having none. If you only have $1,000 saved, that might not cover your living expenses if you lose your job. But if you find yourself with an unexpected $800 car repair, you’ll be able to handle it without taking on credit card debt.