What Is the Right Emergency Fund Amount and How to Save It?

Updated · Aug 05, 2022

It's a fact of life: emergencies happen.

A job loss, a car accident, a natural disaster—all these things can leave you scrambling to pay your bills.

That's why some experts recommend having a 12-month emergency fund. With that amount, you'll always be prepared for the unexpected.

But saving that much money can be difficult, especially if you live paycheck to paycheck.

So, how to calculate the right emergency fund amount and save it?

Here are a few tips to help you get started.

How Much Emergency Funds Do I Need?

The size of your emergency fund is an important decision. You want to make sure you have enough saved up to cover any unexpected expenses.

But how to calculate the emergency fund for your needs?

If you save too little, your emergency fund might run out when you most need it.

But you don't want to save too much either. That's money you could have invested instead.

So, to answer the question "How much should I have in emergency savings?", you need to consider several factors.

The Size of Your Family

The size of your family can help you decide how much money you should save for an emergency fund.

If you're supporting only yourself, a three to six months emergency fund will suffice.

But if you have a large family, you will need to take care of everyone if something bad happens.

So, start by calculating your monthly household income and expenses. Evaluate your family's financial situation, how much you need, and what you can afford to set aside.

A 12-month emergency fund is the safest option if you have children, even if both you and your spouse contribute to the household income.

Job Security

Job security is a major factor to consider when determining how many months of expenses should be saved. If you have a secure job with good prospects, you can get away with saving less.

That said, if you work in a volatile sector or are self-employed, you must have a larger safety net. Sectors that are typically considered more secure include healthcare, education, and government.

Of course, there are always exceptions. Even these jobs can be at risk in certain economic conditions.

So, to answer the question, “How much emergency fund should I have?” you need to consider your circumstances but also global and local tendencies.

Your Income

Job security and the size of your family can help you determine the emergency fund amount you need.

How fast you can save it is another story.

A good rule of thumb is the 50/30/20 budgeting system. According to it, you have to set aside 20% of your earnings.

Ultimately, the answer to the question, “How much money should I save each month?” depends on your income.

If you make a lot of money, then you will have more disposable income to put towards savings.

With a smaller income, you might have to tighten your budget to save enough money. Alternatively, look for ways to increase your earnings.

For example, you can learn how to make money from your hobbies or temporarily take on a second job.

How to Build a 12-Month Emergency Fund?

Now that you have an answer to the question, “How much money do I need in my emergency fund?” you can focus on building it.

That’s not an easy feat, but we’ve prepared a few helpful and applicable tips that will help you.

Let’s see how to build an emergency fund.

Automate Your Savings

One of the best ways to save money is to set up automatic transfers into a separate account with your bank.

Alternatively, you can use an app like Digit. It sets aside money for you automatically.

This way, you won’t have to wonder, “How much savings should I have?” and be tempted to spend money instead of saving it. The app will set it aside for you.

Cut Back on Expenses

Now that you have your 12 or 6-month savings plan, it’s time to figure out how to reach your goal.

Evaluate your budget and see what you can cut back on.

Maybe you can pack your lunch for work or find a cheaper cell phone plan. Any little bit can help when you're trying to save for an emergency fund.

Get Creative With Your Income

What if you’ve calculated that you need a $30,000 emergency fund, but you only make $70,000 a year?

Given the high average cost of living in the US, it’ll take you ages to get there! To boost your savings quickly, you need to get creative with your income.

You could pick up a part-time job or find a passive income stream.

Once you have some extra money coming in, you can put it toward your emergency fund.

Make It a Priority

Saving for an emergency fund should be a priority. Methods like Dave Ramsey’s baby steps can help you with that.

Even if you don’t follow the ​​recommended emergency fund amounts strictly, you can still use the approach to reach your goals faster.

You may need to make some sacrifices, but it will be worth it.

Once you know you're prepared for anything, you can decide how to spend the rest of your money.

Where to Keep Your Emergency Fund?

So far, we’ve covered how many months of savings you should have and how to get there.

Before you start saving, there’s one last question we need to answer:

Where to keep your money?

Ideally, you want them to grow over time. This means you need to figure out where to invest your emergency fund.

Here’s what you have to take into account before you decide:

First comes safety. Regardless of how much is in your emergency fund, you'll want to protect it from loss or theft.

At the same time, the money needs to be easily accessible in case of an emergency. This means you need a liquid account so you can withdraw your money quickly and without penalties.

Finally, you'll want to consider low-risk investments. Although you don't know when you'll need your emergency funds, it's better to have them growing than just lying around.

Luckily, there are several options that can provide safety, liquidity, and high yield for your emergency fund.

One option is a high-yield savings account. Typically, they have higher interest rates than traditional savings accounts. You can find the best offers at online banks.

Another option is a short-term certificate of deposit (CD). They offer higher interest rates than traditional emergency savings accounts. Plus, they are FDIC insured, which makes them very secure.

The downside is that you can't touch your money for a certain period. If you do, you'll need to pay steep early withdrawal penalties.

Another option is a money market account. It is very similar to a CD. The main differences are that the former are more liquid and pay slightly lower interest.

Ultimately, the best choice depends on your circumstances and priorities.

Wrap Up

No matter where you choose to keep your money, you need to have enough to cover your needs during a crisis.

Having a 12-month emergency fund can give you peace of mind and help you weather any storms that come your way.

Aleksandra Yosifova
Aleksandra Yosifova

With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.