What is an emergency fund for?
An emergency fund is cash set aside for unplanned, necessary costs: a job loss, a medical bill, an urgent car or home repair. Its job is to keep you from putting those costs on a credit card or pulling money out of long-term investments at a bad time.
It isn't meant for planned expenses like a vacation, holiday gifts or a car you know you'll replace next year. Save for those separately so the emergency fund stays intact.
How much should you have in an emergency fund?
The usual guideline is 3 to 6 months of essential expenses. Treat this as a starting point and adjust it to your situation:
- Toward 3 months: two steady incomes in the household, secure employment, few dependents, good insurance coverage.
- Toward 6 months or more: a single income, self-employment or commission pay, dependents, an older car or home, or a job that would take a while to replace.
Your target depends on your personal circumstances, so use the rule of thumb as a guide rather than a requirement.
How do you calculate essential monthly expenses?
Essential expenses are the bills you would still have to pay if your income stopped. Go through a couple of months of bank and card statements and pull out:
- Housing: rent or mortgage payment, plus property tax and insurance if you pay them separately.
- Utilities: electricity, gas, water, trash.
- Food: groceries, not restaurant meals.
- Transportation: car payment, fuel, transit pass, car insurance.
- Insurance: health, life and any other policies you pay yourself.
- Minimum debt payments: the required minimum only.
- Phone and internet, plus any regular medical or childcare costs.
Leave out savings contributions, subscriptions you could cancel, dining out and other spending you would cut in a crisis. Here is an example budget with hypothetical figures:
| Essential expense | Per month |
|---|---|
| Rent | $1,400 |
| Utilities | $180 |
| Groceries | $450 |
| Transportation | $260 |
| Insurance | $190 |
| Minimum debt payments | $150 |
| Phone and internet | $90 |
| Medical | $80 |
| Total | $2,800 |
If you are paid hourly or your hours vary, it helps to convert your pay to a monthly figure first. The salary to hourly calculator can switch between yearly, weekly and hourly pay.
How long will it take to build your emergency fund?
Divide your goal by what you can save each month and round up. Using the $2,800-a-month example budget:
| Saving per month | $1,000 starter | 1 month ($2,800) | 3 months ($8,400) | 6 months ($16,800) |
|---|---|---|---|---|
| $100 | 10 months | 28 months | 84 months | 168 months |
| $200 | 5 months | 14 months | 42 months | 84 months |
| $300 | 4 months | 10 months | 28 months | 56 months |
| $500 | 2 months | 6 months | 17 months | 34 months |
| $750 | 2 months | 4 months | 12 months | 23 months |
| $1,000 | 1 month | 3 months | 9 months | 17 months |
Interest helps a little. At a hypothetical 4% APY with deposits at the end of each month, $500 a month reaches $16,800 in 32 months instead of 34, and $300 a month in 52 months instead of 56. To model your own numbers with interest, use the savings calculator.
Where should you keep an emergency fund?
The money should be safe, easy to reach within a day or two and separate from your checking account so you don't spend it by accident. Common choices:
- High-yield savings account: easy access and usually a higher rate than a standard savings account. In the US, check that it is FDIC insured (or NCUA insured for credit unions). Compare accounts by APY; APR vs APY explains why.
- Money market account: similar to a savings account, sometimes with check-writing.
- Short-term CDs: can pay more, but early withdrawal penalties make them better for the part of the fund you are least likely to need.
Avoid keeping the fund in stocks or other investments that can fall in value right when you need the cash. And because prices rise over time, revisit your target every year or so. The inflation calculator shows how much a fixed amount loses in buying power at a given inflation rate.
Steps to start your emergency fund
- Work out your essential monthly expenses using the list above.
- Pick a first goal you can reach in a few months, such as $1,000 or one month of expenses.
- Open a separate savings account so the money is out of sight.
- Automate a transfer on payday for a fixed amount.
- Add windfalls: put part of any tax refund, bonus or cash gift into the fund.
- Tackle high-interest debt once a starter fund is in place. The debt avalanche vs snowball guide compares two ways to do it.
- Raise the target in stages to three months, then toward six if your situation calls for it.
- Refill it after you use it before going back to other savings goals.