Rule of Thumb: How Big Should Your Emergency Fund Be?

Most experts recommend an emergency fund of 3-6 months’ worth of expenses

graphic showing two people on top of stack of books with a ruler and pencil. the words "financial rules of thumb" are in the middle

Emergency funds can really save the day if you need them, but it can be tough to know how much to save. According to a popular rule of thumb, you should aim for between three and six months’ worth of expenses. But in some circumstances, you may want to save up to 12 months’ of living expenses. 

You’re not alone if that sounds like a lot, but you don’t need to save it all at once. We’ll help you figure out how large of an emergency fund you actually need, based on your situation, and how to start building it.

Key Takeaways

  • Most experts recommend keeping three to six months’ worth of expenses in an emergency fund, but some situations warrant more.
  • Some experts recommend a smaller emergency fund while you’re paying off debt.
  • If your job is secure and you don’t have a lot of expenses, you may be able to save less.
  • If your job isn’t secure and you have more expenses, you may need to save more. 
  • Focus on developing a habit of saving, rather than the big target number.

What Is the Rule of Thumb for Your Emergency Fund Amount?

Most financial experts recommend having three to six months’ worth of expenses available for emergencies. That’s a pretty wide range; knowing which end of the range to target depends on several factors. 

Saving three to four months’ worth of expenses might be enough if:

  • You’re relatively healthy
  • You don’t have much debt
  • You live in a low cost-of-living area
  • You rent and your car (if you have one) is reliable
  • You could easily find a job if you lose your current one
  • You don’t have kids or dependents (including furry ones) relying on your income
  • Your job is very stable
  • You have a partner or other family you can rely on for financial assistance

Saving closer to six months’ worth of expenses is recommended if:

  • You live in a high cost-of-living area
  • It’d be hard for you to find a job if you lose your current one
  • You own your own home (especially if you have an older home)
  • Your job isn’t very stable (you’re a seasonal worker, gig worker, or an artist)
  • You have children, a stay-at-home spouse, pets, and/or other dependents you support
  • You have a medical condition, or do high-risk activities (like rock climbing or BASE jumping)
  • You lack a financial support network

Saving a year’s worth of living expenses is ideal if:

  • You have a high income
  • You have a niche position or specialized job that might require relocation or take extra time to replace
  • You are the sole provider to multiple dependents
  • You are retired or are nearing retirement

A lot of people will be a blend of these. But if you see more potential for risks in your life, consider saving more versus less.

How to Build Your Emergency Fund

Calculate how much your emergency fund should have and take steps to fund it.

  1. Set a savings goal: Determine how many months of expenses to save, between three and six months, based on your personal circumstances and risk factors. 
  2. Calculate one month’s worth of expenses: When calculating expenses, only tally up things you’d still pay for in an emergency, like rent, groceries, and bills. Leave out optional expenditures like travel and dinners out.
  3. Calculate the dollar amount of your savings goal: Multiply your monthly expenses by the number of months you want to save. For example, if you want to save four months’ expenses and one month’s expenses are $2,000, your target is an $8,000 emergency fund ($2,000 x 4). 
  4. Automate your savings: If you automate your savings, you’re more likely to succeed. Decide how much you can afford to save each month, then set up automatic deposits into your savings account from your checking account after you get paid.
  5. Capitalize on savings opportunities: If you come across other money, such as a tax refund, side hustle income, or even a $20 bill in the parking lot, deposit it in your emergency fund to reach your goal sooner.

Don’t get flustered if your goal seems difficult to reach. Just remember that you don’t need it all immediately, or even next year. It’s better to think of your emergency savings fund as an ongoing process, like your retirement savings account. Then, once you do reach it, you’ll have extra money each month to put toward other goals.

Why the Emergency Fund Rule of Thumb Generally Works

An emergency fund is designed to protect you from common worst-case financial scenarios, such as a job loss. For many, three to six months’ worth of expenses provides ample time to find another job, even if it’s just a temporary holdover or part-time gig while continuing to look for work. 

Emergency funds are also designed to protect against smaller emergencies, such as:

  • A sick pet
  • Home repairs
  • A broken-down car
  • Surprise medical bills

It’s important to be disciplined. Don’t rationalize a flash sale or expensive gift as an emergency just because you want it. It can be tough to resist temptation, but it’s essential to make sure you and your family are prepared in the event of a real emergency

If you don’t have enough money to take care of a real problem, you could be forced to go into debt or worse. Besides, it’s always better to earn interest in a savings account than pay interest to a lender.

Grain of Salt

The three-to-six-month emergency fund goal is only one of several rules of thumb for how much money to save. Here are a couple of others:

The $2,467 Rule of Thumb

One of the biggest barriers to saving three to six months’ worth of expenses is psychological: It seems so high, so why even try? However, a recent study came out that shows lower-income families in particular may not need to save that much. 

According to researchers at the Universidad Diego Portales and the University of Colorado at Boulder, lower-income families could be fine with as little as $2,467. Of course, more is always better (to a point), but if this target motivates you to save, then go for it.

A Two-Step Emergency Fund

Some experts like Dave Ramsey recommend a two-step approach to your emergency fund. Ramsey suggests first saving a “starter” emergency fund of $1,000 if you have debt. Then, once you’ve paid the debt off, redirect those payments to fully fund an emergency fund with three to six months’ worth of expenses.

A $1,000 emergency fund isn’t that much, especially if you have a family, an unstable job, or live in a high cost-of-living area. If paying off debt is likely to take years rather than months, don’t wait to save for an emergency fund big enough for your needs.

Only You Can Decide The Right Amount

Your emergency fund is designed to keep you safe in a financial emergency, and only you can determine what that amount is. Remember, you don’t need it all right away. Working slowly towards your goal is fine, as long as you’re making progress.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.