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How Much Do You (Really) Need in an Emergency Fund?


One of my goals for this blog is to try to provide authoritative answers to some of the most commonly asked questions about money.

One such question is:

“How much do I need to save in an emergency fund?

Long ago, I answered that question with a way-too-complicated formula. It was an interesting way to tackle it, but ultimately I think you want—and I want to provide you with—a much simpler answer.

The good news is that if you save just $1,000, you’ll be better off than more than a third of working Americans. According to a MetLife study on emergency savings last year I found in a New York Times blog post on the subject, 36% of full-time employees in the U.S. have less than $1,000 saved and 46% have less than $5,000.

36% of full-time employees in the U.S. have less than $1,000 saved and 46% have less than $5,000.

Assuming you want to do better for yourself, just how much is enough?

Unfortunately, even financial pundits don’t always agree on a magic number for your rainy day savings. Dave Ramsey says to save between three and size months expenses and Suze Orman says eight months.

But as you can see in reader responses to a similar question on the blog Get Rich Slowly, everybody has a different opinion on how much should be in an emergency fund. Ultimately, I more or less agree with J.D. who, in turn, is agreeing with Dave Ramsey.

  • Start with $1,000 in savings.
  • Pay off credit card debt.
  • Save at least three months expenses, six months if you can.

Where my philosophy differs from Ramsey is that he’ll tell you to pay off student loans and other low-interest debts before saving cash for an emergency. Personally, I would pay off high-rate credit cards, then pad my emergency funds before paying off loans with interest rates lower than six or seven percent.

When it comes down to the final amount, well, personal finance is personal, and it’s ultimately up to you. If you’re young and single and just starting out in your career, three months should suffice. As you add responsibilities like a mortgage and a family, however, you’ll probably want to save more. My wife and I recently exceeded six months’ expenses, which we’re satisfied with for now.

What do you think? How much—in terms of months’ living expenses—seems right to you?

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Thanks to UpsideofMoney for including this post in this week’s Carnival of Personal Finance.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I think it really depends on the current situation. Since we have a serious chronic illness in the family 6 months seems just the bare minimum to feel somewhat comfortable.

  2. I’m married. My wife and I bring home about the same amount (a couple hundred per month difference). Our goal is to have 3 months of expenses. If we both were to lose our jobs (which would be highly unlikely, but let’s cross our fingers), then we’d be able to survive (without unemployment benefits) for 3 months. In the situation that only one of us is unemployed (which is much more likely), that amount should cover us for at least 6 months. If we added in unemployment benefits, we could probably last as long as a year!

  3. I think three months is a good goal to aim for. But something is better than nothing, even if it is just $1,000.

  4. It astonishes me how little people have in savings. Anyway, I would say for someone starting out it’s important to set goals that can be reached quickly. Like, start with 1 month of expenses, then two and then three. Maybe from there round up to the next $100 and call it a day. I agree that as your finances grow more “complex” that you should probably have about 6 months. I think 8 months is too much for most people–that is like saving an entire year’s salary (after taxes) and is difficult to do.

  5. I think you need at least a years worth of income in this current state of the economy

  6. What I don’t get is where we should stash our emergency fund. Do we need immediate access to ALL of it? Can we put some of it in the stock market? I have my emergency fund in an HSBC Direct online savings account, and I hate that it’s only earning .9% APY.

    • David Weliver says:

      Although it’s unlikely you’d need to tap most of your emergency fund at once, is it impossible? I don’t know. Since the point of emergency savings isn’t really to earn a return but rather to be there as a reserve, I don’t give much thought to the interest it’s earning.

      Some people create CD ladders, in which you put a fraction of your savings in a certificate of deposit that matures in so many months, then do the same every month. This way you can take advantage of CDs’ higher interest rates but have cash available as they mature every month. That’s way too complicated for me, however.

      Warren Buffet’s company has $20 BILLION in CASH. It’s not earning him a return, but he “sleeps well at night”.

      http://www.theglobeandmail.com/report-on-business/your-business/exit/john-warrillow/cash-cushion-advice-from-warren-buffett/article1941079/

      • David, thanks so much for your reply! It does bother me that I’m losing money against inflation, but, wow – how surprising about Buffet! At least I’m earning something!

    • I have an emergency fund which is in a savings account so I can access it right away, and I also have another larger account with one of Vanguard’s bond index funds. The bond fund value fluctuates a little, and if I do have to pull money out for an emergency, I am ahead of the game because 6% it much better than 1%.

  7. I saved until I had one year’s salary in savings. I also sleep well at night because of it.

  8. I’m shooting for at least 6 months worth for my wife and I. We’ll also look to use it as a down payment on a house when the time comes.

    Definitely found that I sleep a little better, as Daniel noted!

  9. I have more than 3, less than 6 months right now… but i’m still trying to get it to 6 months.

    I have other savings accounts and other “bank padding” and if I combined them now, i’d have the $11,000.00 I need… but I want 11k seperate from all of my accounts… so i’m a few grand short and saving for it.

  10. Question for everyone: If you had $17k on a 7% credit card and $1000 in emergency fund, what would you do? Pay off card first, or add to emergency fund? We could get the emergency fund up to $3-5k pretty quickly.

    • I’d go after the CC debt first. Sure 7% isn’t terrible as far as credit cards go, but it’s still a lot of interest on $17k…$1,000+ a year if the balance just sits there. Perhaps with the sole exception of somebody that has a credit card balance at 0%, I will always say pay off the card before saving more than $1,000. There’s just nothing good about credit card debt, too many ways it can come back and bite you. Ditch it.

    • I would put most of my money toward the credit card. I don’t know how much money your thinking of throwing at it monthly, but it wouldn’t be a bad idea to put $100-$250/month toward your emergency fund. I would imagine that $17k would take a while (maybe 12-18 months) to pay off so by not putting money toward an emergency, you’re basically making the bet that you won’t lose your job or have another emergency during that whole time. As you get closer to the end of that $17k and as your emergency fund gets a little bigger each month, you might decide to take the emergency fund down to $1000 or so and put the stake in the heart of the debt. At that point, without anymore CC debt, it would be easy to build that 3-6 months back up.

      • Thanks for the reply.

        Our plan is to pay off the $17k by Sept/Oct of this year, so in 5-6 months. This is with us focusing all extra money towards the CC and leaving the emergency fund at $1k.

        That said, should we put some amount (like $250/month) towards emergency fund and cut back that much off the CC payment? Obviously this will push us paying off CC by a month or two.

        • If my math is correct, you’re planning on throwing about $2833 toward the CCs each month. When we’re talking about 5-6 months, it’s not going to make that much difference. I, personally, would probably round that number down and throw $2500 toward the CC each month and put the $333 in savings. Once you hit that 4th or 5th month, you’ll have about $2500 in your emergency fund. In that 6th month, if you don’t have an emergency between now and then, you can deplete your emergency fund and throw $5000 at the CC and finish it off. Then, from month 7 on until you feel comfortable, keep putting $2833 toward your emergency fund. In a year from now, rather than having $17k in CC debt, you’ll have $17k in savings! That’s pretty awesome!

  11. The amount needed in an emergency fund varies depending on your monthly obligations. I would be more concerned with where your emergency fund is stashed. A typical savings account will cause inflation to outpace your emergency fund. Id suggest an online brokerage account since its almost just as liquid

  12. As a freelancer, a year is my minimum. There are times where I could go a year without working for whatever reason.

  13. Start by applying 15% of your gross income to paying off your credit card debt and starting your emergency fund; you might want to put 10% (2/3) towards your credit cards and 5% (1/3) towards your emergency fund. Once your credit card debt is paid off, then the entire 15% goes to your emergency fund. The amount needed in your emergency fund is the number of months of expenses it would take you to find a job if you lost the one you currently have.

  14. I definitely think this number is dependent on your situation and discipline.

    My wife and I have about 6 months worth of savings, but in all honestly could stretch it to a year probably.

    I think people forget that there are almost always methods to cut down on expenses if your job gets cut
    -get rid of cable tv
    -dont eat out
    -eat less expensive food at home
    -turn down the heat/AC
    -dont buy any clothes
    -don’t drive very much
    -sell a car

    Now on the flip side, you should have more money put away in case of some kind of accident or illness. But as far as just losing a job goes- it’s MUCH easier to live on less than some people make it out to be.

    That’s why we all really go to college, right? To learn how to enjoy life with less?

  15. I hate the my Dad is bigger than your Dad thing going on here, but here is an older guy’s perspective. I’m 51. I’ve been married since I was 24. I’ve been the sole earner and we have two grown kids that I’ve put through school.

    It was hard to begin with, financially. We married at 24 years. We had kids at 26, 28. I started paying into a retirement savings plan from the get-go. I remember in our early years, paying for groceries on credit cards ahead of payday… but at least I kept up our savings… Savings that suffered in the 80s and again in 2008-2010 to the point of wincing. The upside is ‘dollar cost averaging’. Hold firm to your investment plan…. (Seriously – read about dollar cost averaging and pin your colors to your mast!)

    The years have passed, our kids have grown, and I’m now really focused on retirement preparation. We own our house. We have 650k in 401k. We have no debt. We have 550k in pension savings and ~600k in shares. All in all we have a net worth of 2.2m. I’m just a salaried guy.

    I earn a good salary now, but the key to this was doing the right things from early on, when I didn’t earn so much. But it looked fairly bleak in my 30s and even late 40s.

    My point in posting is that you just need to keep doing the right things and it will pay off for you: keep a saving budget & discipline, don’t over mortgage, keep expensive credit under control, buy good used cars to keep for a decade, and have a little fun on the way.

    Just one old-guy’s perspective. Your mileage may vary. Good luck all.

    Travel well,

    Brian

    • Samantha says:

      Great advice Brian, I’m 24 and money’s really tight but trying to do the best I can. Good to hear your success story : )

  16. I think some of the basics to consider are: how steady is your job? how old is the car? do you have any pending medical needs? Then there is the delicate relationship between paying down debt and saving.

  17. After looking at the BLS Unemployment numbers for May 2011, 59% of unemployed have been so for 15 weeks, and given the way the statistics are collected/calculated the percentage is probably higher than that. This leads me to believe that a good emergency fund should have a minimum of 4 months of living expenses. Particularly if you work as any sort of contract job that may not be eligible for unemployment benefits.

  18. I have about 150k in savings and 50k in retirement funds and CDs that I can not touch unless I really have to. The 150k in savings I plan on eventually using some of that to buy some investment properties. I only need about 2200 dollars a month to cover monthly bills, like car insurance, rent, cell phone and other monthly bills. I have no debt at all, car is paid off, motorcycle is paid off and always pay off my credit card balances in full each month and never carry anything over. I sleep well at night knowing I have enough to survive for a couple years should I loose my job in this bad economy. My savings are growing really well, my year income is about 135k. My company does not have a 401k currently and I also max my IRA. I feel like I am lacking investments and have too much cash on hand (I think thats a good thing but can be bad since its not earning enough percentage).