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How Much Should I Put into My Emergency Fund?

Few things can ruin your day—and your bank account—like a dropped transmission, a broken water heater, or a pink slip from your boss.

Financial emergencies can knock you off course and plunge you into debt if you aren’t prepared for. Just 39% of Americans said they would cover an unexpected $1,000 expense with their savings, according to Bankrate’s most recent Financial Security Index survey. Others said they would put it on a credit card or borrow the money from family and friends, and 4% said they didn’t know how they’d pay that $1,000.

We asked financial experts from around the country to tell us how much should be in your emergency fund and how to be smart about that money once it’s in there.

What should my emergency fund look like?

Financial planners recommend at least three months’ worth of income in an account you don’t touch unless it is a true emergency. But that’s just a generalized figure.

“If you are single, have no children, are a renter, have job stability and can move back home if you become unemployed, then you may need three months of savings,” said Harrine Freeman, a Washington D.C.-based financial expert and speaker. 

But throw kids or owning your own home into the mix, or if you are self-employed with a variable income, having nine to 12 months of income in your emergency fund is your best bet, Freeman added.

When figuring out your exact emergency fund goal, be detailed and specific to get the true cost of your monthly expenses.

When figuring out your exact emergency fund goal, be detailed and specific to get the true cost of your monthly expenses. That means not just rent or mortgage payments, according to Jill Caponera, consumer savings expert with Promocodes.com, but car insurance, utility bills, and food.

Review several months’ worth of grocery and gas receipts and decide on an average monthly gas and grocery budget,” she said.

How can I save for an emergency while still paying my bills and student loans?

There is no one-size fits all when it comes to filling up your emergency fund, but there are several ways to funnel money into that account.

Caponera recommends setting aside 20% of your paycheck until you’ve reached your goal. In addition to planning and budgeting your upcoming expenses, such as Christmas or renewing your car registration, find small ways to cut back on everyday purchases.

“It’s no surprise that eating out adds up. The average meal out costs $12.75, and the average American eats out 4.2 times per week, according to Debt.org,” Caponera said. “That cost totals more than $200 per month on lunches alone. The average brown bag lunch cost being just around $4, that’s a monthly savings of over $130, or an annual savings of $1,560.”

Ramsay Leimenstoll, a paraplanner with Bell Investment Advisors in San Francisco, recommended setting up an automatic transfer each month to make sure the money is getting into savings. She also suggests what she calls the “savings snowball method” if the idea of saving three to six months of income seems too daunting.

“Can they save up one month’s mortgage or rent payment? Next, can they save one month’s utility bills and groceries? Being able to hit these smaller goals in quick succession can be a helpful psychological motivator that makes the goal seem more reasonable,” she said.

What constitutes a financial “emergency?”

Loss of income, a serious medical event, and car repairs definitely fall within every financial experts’ definition of “emergency.” But those aren’t the only reasons you may need to tap into those savings.

“An emergency expense is an unexpected event and, in some instances, is out of your control,” Freeman said, ticking off a list of events that meet her criteria for an emergency. “Dental or vision emergencies, divorce, the death of a spouse, or unexpected home repairs, such as an appliance or HVAC repairs, roof repairs, and water and sewage backups.”

David Flores Wilson, senior wealth manager at Watts Capital in New York City, said he reminds his clients that emergencies worth dipping into your savings for don’t always have to be bad.

“Emergency funds are not just for only unforeseen crises like the loss of a job or an unforeseen illness, but they can be used as tools for good opportunities,” he said, “like moving across the country for a slightly lower paying job that has better long-term potential or starting a new business.

Emergency funds are not just for only unforeseen crises like the loss of a job or an unforeseen illness, but they can be used as tools for good opportunities.

So what is most definitely not an emergency? “The latest gadget, upgrades to any service like cell phone or internet, clothing, a new car, a new home,” said Freeman, “vacation, concert tickets, electronics, furniture, jewelry, or personal services.”

Where should I keep my emergency fund?

Not under your mattress—where it can be stolen or lost in a fire or natural disaster—and not in the stock market where a dip could take out a chunk of your savings when you may need it the most. And don’t put it in a CD, where it will be locked up and out of reach.

Byron Ellis, a certified financial planner with United Capital Financial Life Management in The Woodlands, Texas and the founder of Doing Money Right, tells his clients to keep their emergency fund in a savings or money market account that’s separate from their checking account.

“In other words, easy to get when you need it,” he said, “but not as tempting as your checkbook or ATM.”

Leimenstoll echoed the advice to make sure your emergency funds are in a separate savings account, even a different banking institution—the higher the yield the better.

“Don’t get discouraged if you have to use your emergency fund and then have to spend a few months replenishing it,” she said. “That’s what it’s for!”

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.