How Much You Should Have In Your Emergency Fund

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If you’re living paycheck-to-paycheck in 2023, you’re not alone. In fact, nearly half of millennials are struggling to break the paycheck-to-paycheck cycle. You might not prioritize saving over your day-to-day spending — but an unexpected emergency can devastate your finances. 

So, how much should you have set aside for an emergency? Here’s what you need to know.

Key Takeaway

As a general rule, you should have enough saved for about three to six months of expenses. The exact dollar amount you need in your emergency fund depends on your income, family size and a few other factors.

What Is an Emergency Fund?

An emergency fund is any money you have set aside for an emergency — and only an emergency. This isn’t money you plan on spending on your first home or another big purchase.

That might seem self-explanatory, but not everyone has an emergency fund. In fact, CNBC reported last year that over 50% of Americans say they can’t pay for a $1,000 emergency out-of-pocket. Keeping an emergency fund separate from your long-term savings ensures you won’t have to sacrifice your financial goals or go into debt to pay for an emergency. 

How Much You Need in an Emergency Account

So, how much should you have set aside for an emergency? The exact number won’t be the same for everyone. It’s wise to have enough money saved to support your household for three to six months. This gives you a financial safety net for things like unexpected repairs or the loss of a job.

For example, if your monthly expenses are around $3,200, then about $20,000 would be enough for a six-month emergency fund.

Here are a few factors to keep in mind when planning your emergency savings.

Your Household Size

Your emergency fund should cover at least a few months of your entire household’s spending. If you live with your partner, your emergency fund should be able to support both of you — and any dependents. 

Your Monthly Budget

Consider your monthly expenses. If you lost your source of income due to an emergency, which payments would you still need to make? Your monthly budget might include: 

• Housing — rent or mortgage payments
• Childcare
• Grocery budget
• Utilities
• Health, auto and home insurance
• Loan payments

Some payments you don’t need to factor into an emergency budget include: 

• Streaming services
• Non-essential shopping
• Vacations and meals out
• Long-term savings, including contributions to your 401(k) or other investment accounts

Potential Risks

There’s no way to plan for every emergency. But you can evaluate your potential risks to be as prepared as possible. For example, if you live in an area that’s prone to fires, keep in mind the cost of an emergency evacuation, which may not be fully covered by your insurance.

Where To Keep Your Emergency Fund

To avoid spending your emergency fund before you need it, you’ll want to keep it in a separate account from your checking or long-term savings.

A safe high-yield savings account is the best place to keep your emergency fund. A high-yield account accrues more interest than a standard savings account, so your savings will grow faster.

Building up an Emergency Fund

You might not be able to come up with your emergency fund all at once — and that’s okay. You can build it up over time through small transfers, automated savings and side gigs. Transferring a tiny percentage of each paycheck into your emergency account means you’ll be better prepared with each passing month.

The nice thing about your emergency fund is that it doesn’t need to keep growing. Once you have a comfortable six-month emergency fund built up, you can set it aside to focus on your long-term savings and investments.

When Should You Spend It?

Remember, an emergency fund is not the same as a nest egg or retirement fund. You shouldn’t plan on spending your emergency fund unless absolutely necessary. However, your emergency fund can help you avoid digging into your nest egg when something unexpected happens.

You should only spend your emergency fund if:

• The cost is totally unplanned.
• It’s the only way to avoid spending your long-term savings.
• It’s the only way to avoid an expensive loan.

Something Is Better than Nothing

Whether it’s $2,000 or $100,000, you should have money set aside in case of an emergency. Consider your household size, monthly budget and potential risk factors. Your goal should be to save enough to support yourself for a few months. 

If a three to six-month budget feels unattainable, just start wherever you can. Something is always better than nothing. If you start saving today — even if it’s just your spare change — you’ll be better prepared for an emergency in the future.

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