How much money do you really need in your emergency fund?
- Feb. 9, 2024
- 3 min read
The expenses an emergency fund should cover
How to calculate the amount needed
How many months of savings to set aside
When it comes to emergency funds, one size does not fit all. The amount you'll want to save depends on factors like your income, monthly costs and if you have any dependents. So, how much do you need in your emergency fund?
What to consider when determining the amount
The general guidance is to have three to six months' worth of essential expenses set aside in your emergency savings. Essential expenses are those things that you truly need to live: a rent or mortgage, utilities, groceries and transportation.
Essential vs. non-essential expenses
Once you've sorted your expenses, take your monthly essential expenses ($975, in the above example) and multiply it by the number of months you decide to save for (six) to help determine how much you should have in your emergency fund: $975 x 6 months = $5,850.
Don't worry if these amounts don't seem reasonable. Your own numbers might look very different, and keep in mind that it takes time to build up an emergency fund . Just focus on consistently saving.
Essential expenses are those things that you truly need to live: a rent or mortgage, utilities, groceries and transportation.
Job market and personal job security
Health insurance coverage and stability
Current lifestyle expenses
Upcoming repairs on an older vehicle or home
A savings account allows you to easily withdraw your money without penalty and earns compound interest on your original principal and your accumulated interest.
A certificate of deposit (CD) offers a fixed interest rate on your savings, but it's harder to access your money without facing a penalty.
Your checking account allows you to access your money whenever you would like, but you might not earn any interest (or the interest rate might be low).
A money market account pays interest and provides easy access to your funds, but you may have to maintain a minimum balance.
To make saving for an emergency easier, you can create savings buckets within your Ally Bank Savings Account . When you can separate your different savings goals, it's easier to achieve them and resist dipping into your emergency-specific fund.
Start building your emergency fund now, and you'll thank yourself when your car needs an expensive repair or you receive an unexpected medical bill. You could even use your emergency savings for surprise costs, like paying a parking ticket or giving yourself money for essentials if you're laid off.
A major savings mistake is neglecting the importance of emergency savings in the first place. So if you're already setting money aside, you're on the right track. Avoid using your emergency savings for discretionary purchases, and always replenish the fund when needed.
Having the right amount in your emergency savings fund can help protect you against a financial crisis. Ideally, you won't run into situations where you need to deplete your emergency savings . If you do need to dip into your emergency fund, don't worry — that's what you saved for!