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How Much Should You Save in Your Emergency Fund?

Life is all good until your company downsizes. Or you trip and fracture your elbow. Or that jerk runs the red light and hits your car. Or, oops, you are the jerk that ran the red light and hit the car.

Life’s costly little surprises can become major financial pitfalls, but building an initial emergency fund can mean the difference between an inconvenient headache and a downward spiral into credit card debt or even personal bankruptcy.

“The point is to stop living paycheck to paycheck,” said Sophia Bera CFP, 32, whose firm, Gen Y Planning, caters to young professionals in their 20s and 30s. “And when you have an emergency fund it turns a major emergency into a minor inconvenience.”

As your financial life grows and you have established your initial emergency fund, there are additional strategies for building other goal-based savings, whether it’s for intermediate needs or long-term savings and retirement.

Read more: Where Should You Keep Your Emergency Fund?

However, if you’re just getting started on your savings journey, here are Bera’s top tips for setting up and maintaining an initial emergency fund:

Calculate a Target Amount

“I generally recommend three months of net pay set aside for emergencies,” she said. “If you get two paychecks a month, and they are each $3,000 that’s $6,000. I would multiply that by three, so you’re looking at about nearly $20,000 in emergency savings.”

The goal is to have enough on hand to cover your basic living expenses for several months—such as rent, transportation, student loans, food, and other basics. Keep in mind that if/when you’ll be using this fund for unexpected periods of unemployment, the period for finding a new job could depend on your profession and level—and that could impact your target savings number. Typically, the higher your level, the longer it takes to find new employment.

Start Your Savings, Even with Debt

Debt begets debt, Bera said, unless you dig out of that downward spiral. Start building an emergency cushion immediately – even if it’s not three months’ worth of pay — and then focus your full attention on paying off your debt, in particular, high-interest debt (e.g. credit cards) if you have it.

“Start with that one month of emergency savings and get there.”

“Start with that one month of emergency savings and get there, and then aggressively pay down your debt,” she said. “What having one month of emergency savings does is at least gets you out of that debt cycle.”

With other debt such as student loans, do what you can to make sure you’re in the best place possible with it—whether that’s paying your highest rate loans more aggressively, refinancing into a lower rate, or consolidating your loans so that you only have one monthly payment.

A benefit to refinancing with Earnest is the ability to customize your monthly student loan payment to an amount that fits your budget—whether that’s more or less than you’re currently paying.

Make Automatic Contributions

Earmark an account and start the cash flow to that so that you don’t even miss the money that’s going into it. You might be able to do this with your company’s payment system that allows you to send your monthly paycheck to different accounts.

Alternatively, you can typically link automatic transfers from your checking to a savings account as well so that they happen the same day you get paid.

“It’s not going to happen overnight,” Bera said. “Just start by trying to accumulate a few thousand dollars.”

Health Insurance Is Important

Medical bills are a major reason for financial emergencies, Bera said, even for young people in their 20s and 30s. And many millennials still don’t carry health insurance–11% are uninsured according to a 2016 study by Transamerica Center for Health Studies.

Even if you have insurance, Bera said, a trip to the emergency room can still be very costly.

“A lot of insurance policies are 80/20 so if you break your arm, and it’s $20,000, a lot of times there’s a deductible that you have to hit and then you still have to pay 20% out of pocket for the cost,” she said. “So you may still be on the hook for several thousand dollars in out of pocket health insurance costs.”

Alternatively, if you do have health insurance—make sure your plan fits your needs. Companies are increasingly offering high-deductible accounts with an HSA account. If you are using one of these plans, you’ll need to save in your HSA accordingly. The good news is that your balance in an HSA account rolls over from year to year and savings into these accounts can be done with pre-tax dollars. 

Add to Your Fund with a Side Gig

Setting up and adding to an emergency fund is going to take some extra cash that has to come from somewhere. Where to look for savings? If you haven’t set up a budget to see where your monthly cash flow goes, now is a good time to do that. Also if you get an unexpected windfall, you might add to your emergency fund if you’re in a good place with any debt.

If you want to build your fund and don’t have extra to spare in your normal budget, think about what you can do to earn extra money for their emergency fund, Bera said, whether it be a side gig or extra projects at work.

Once that emergency cushion is in place, she said, it will come with a peace of mind that it priceless.

“It literally turns those things that are a huge deal for some people, into not a big deal for other people,” she said. “And that’s the difference between having emergency savings or not.”

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