How Much to Save for your Emergency Fund
An emergency can (and will) happen at any time, and it’s up to you to be financially ready for when it strikes. Whether is a medical emergency or a car accident, your finances should be prepared to handle some of life’s most stressful events. After all, what’s worse than having to worry about your finances at the hospital, or on the side of the road?
Think of Your Needs
When deciding how much you need to save for your emergency fund, the best place to start is considering your current expenses. Think of things like your mortgage, car payments, student loan payments, etc. You need to take all of these into consideration to determine how much you will need. Typically, it is recommended that you save anywhere from 3-6 months of monthly expenses for your emergency fund but remember, the more the better.
Think of your Lifestyle
Would it kill you to not be able to eat out a few nights a week or go get drinks with your friends on Friday night? If your answer is yes, you might need to save a little extra for your emergency fund as they may not be covered. Try to save an extra 10% on top of your monthly expenses to help maintain your current lifestyle. While we certainly recommend trimming back on this lifestyle during a long term emergency, we realize that may be harder for some. The key takeaway here, understand your lifestyle and adjust your finances accordingly.
It might seem intimidating to read that you should have 3-6 months of savings in your emergency fund, but there are steps you can take to alleviate the pressure. By implementing smaller and more reasonable goals, you’ll be able to stay motivated to save more and achieve your ultimate goal quicker.
1. Save $1,000
There are a few different kinds of financial emergencies. Some of which are ongoing and some are one time. To start your emergency fund, save $1,000. This can take care of a large portion of your one-time emergencies, like car trouble or a surprise visit to the ER.
2. Save $5,000
Depending on your monthly expenses, $5,000 might be 3-6 months of your expenses, and that’s great. For others, this might be the midway point between $1,000 and 3-6 months of expenses. Either way, try to save for your less common and more expensive one time expenses.
3. Save 3-6 Months of Expenses
After you’ve saved $5,000, it’s time to say up for 3-6 months of living expenses. This money is meant for longer-term emergencies such as a job loss or long term medical costs.
When do I need my emergency fund?
The short answer, now! Like we’ve mentioned, an emergency is bound to happen at any moment, and they always seem to prey on those without an emergency fund prepared. This should be a financial priority for you and your family. Before paying extra on your mortgage or investing in your retirement, you need to have an emergency fund. It might take a full year (or more) to establish a full emergency fund, so now is the time to start saving. By putting it off, you will only put yourself at more risk of financial trouble.
What is considered an emergency?
When you’re saving for your emergency fund, you might ask yourself, “what constitutes using my emergency fund?”. We’ve got answers. While some are more concrete than others, it is always wise to consult online resources before depleting your emergency fund on something that may not have been an emergency at all.
Don’t confuse an emergency for something that you forgot about!
One of the most common problems with emergency funds is that they get used for things other than emergencies. This defeats its whole purpose. Need new tires for your car? That’s not an emergency! Instead, new tires should be built into your monthly budget so it does not come up as a major expense. Did you spend a night in the ER? That’s an emergency, use your fund! Below we have a chart of common expenses that some confuse with emergencies.
|Natural Disaster Damage||Yes|
|Christmas and Birthday Gifts||No|
|Unexpected Car Repairs||Yes|
|Back to School Supplies||No|
|Loss of Primary Income||Yes|
|Unexpected Tax Due||Yes|
|Unexpected Hospital Trip||Yes|
|New Contact Lenses or Glasses||No|
|Unexpected Dental Procedures||Yes|
Notice how many of the emergencies on this last have the word “unexpected” in front of them. That’s what ultimately defines what an emergency is. An event that you did not plan for (and not because you simply forgot!).
By starting your emergency fund, you can start to alleviate some of the “what ifs” in life and focus on building long term wealth. You will be able to stick to your monthly budget and continue pursuing other financial goals even when the time comes. Not having an emergency fund established is a mistake that you can’t afford to make. Start saving! Be on the lookout for these other financial mistakes people make and learn how to avoid them here.