You may have heard the basic financial advice to have an emergency fund, but do you know how much you need to have in your own emergency fund? The answer depends on a number of factors and your specific situation. Here’s how to think through what amount is right for you.
How much do you spend per month?
This is likely the hardest step in the process. Most financial professionals (including us) talk about emergency fund recommendations in terms of months of expenses, so you will need to do some work to figure out your average monthly spending. Joining the Gym is a great way to figure out what you are spending per month. You can also look at past bank or credit card statements. This number can vary quite a bit month to month, so it’s a good idea to look back several months to get an idea of what your average monthly spending is.
Don’t forget to include:
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Minimum debt payments: Those likely won’t be paused in the event of an emergency such as job loss.
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Discretionary expenses: Would you really want to stop spending on things like personal care or the occasional dinner out in an already stressful emergency? We would recommend including these in your emergency fund calculation.
How many months of expenses should you save?
Three-to-six months of expenses is typically the range recommended for an emergency fund. Three months is a great minimum to start with, with some recommendations of up to twelve months depending on these factors:
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Job security: How secure is your income source? If you’ve worked in the same career long term and that career has been stable in past times of crisis, the guideline of having three months expenses could work for you. For income that is variable or dependent on the economy a good goal might be six months. Those who run their own businesses often follow the recommendation to have twelve months of expenses.
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Other risks: Are there other risks on the expenses side that might lead to sudden expenses? A common example is owning a home. While it’s best practice to save for replacing aging home components in advance, not all home repairs are predictable, so if you own a home you may want extra in your emergency fund.
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Comfort level: If it feels better to have more, that isn’t necessarily a bad idea. However, the downside is that even money in high yield savings typically won’t keep up with inflation which can hurt your wealth long term.
Have you had any life changes recently?
It’s a great practice to set up an emergency fund and forget it (until you need it). However, when there are changes to your income or expenses it’s best to revisit this number. Did you change careers, buy a home, or start a family? These are all great times to revisit your monthly expenses and adjust your emergency fund goal.
Final Thoughts
If saving three months of your expenses seems unrealistic, think about how even a small amount would help in a financial emergency. Check out the blog How to Save Your First $1,000 in Emergency Savings for more on how to start.
