When it comes to financial security, an emergency fund can be an important tool, but one size doesn’t fit all. The amount you need to save depends on your income, monthly costs and if you have any dependents. So, how much do you need in your emergency fund?
How your expenses impact your emergency fund total
The general guidance is to have three to six months' worth of essential expenses set aside in your emergency savings. Your emergency fund isn't meant to replace your entire salary, it only covers what you truly need to live for a certain period of time. This is why calculating your "essential" expenses is the first step in the process.
Essential vs. non-essential expenses
Essential expenses include rent or mortgage payments, utilities, groceries and transportation. Non-essential expenses are things you could go without during a crisis, such as dining at restaurants, streaming services or costly hobbies.
To help calculate your emergency fund it’s important to first understand how your expenses are split. It can be helpful to visually sort them in charts. We’ve added monthly amounts for the sake of the example:
Essential expenses
Category | Monthly Amount |
|---|---|
Housing (Rent / Mortgage) | $1,300 |
Car Loan & Gas | $850 |
Groceries | $500 |
Utilities | $450 |
Total Essential | $3,100 |
Non-essential expenses
Category | Monthly Amount |
|---|---|
Dining out | $200 |
Streaming services | $50 |
Total Non-essential | $250 |
Read more: How to visualize your savings goals with buckets in an Ally Bank Savings Account
Deciding how many months your emergency fund should cover
Once you know your monthly essentials, you must decide on a timeframe. A three-month cushion might be enough for a single person with high job security. However, a six-month fund is often better for families, freelancers or those in more unpredictable industries.
To find your goal, use this simple formula:
Emergency fund formula: monthly essential expenses x number of months you want to cover.
For example, if your essentials total $3,100 and you want a six-month cushion, your goal is $18,600.
To reach that goal, determine your contribution:
Monthly contribution formula: monthly income – monthly expenses = amount available to save.
Where to keep your emergency fund
Your emergency fund should be accessible but separate from your daily spending cash. You have a variety of options:
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 more organized, 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.
When should you use your emergency savings?
Your fund is a "break glass in case of emergency" resource. It’s best used for:
Job market and personal job security
Household income
Health insurance coverage and stability
Current lifestyle expenses
Upcoming repairs on an older vehicle or home
Mistakes to avoid that weaken your emergency savings
A major mistake is neglecting to start your fund – remember, small amounts add up. Avoid using your emergency funds for discretionary purchases or "wants” and replenish the funds when needed.
Preparation can help avoid a cash crisis
Having the right amount in your emergency savings protects you from debt and stress during a financial crisis. Ideally, you won't run into situations where you need to deplete your emergency savings. Whether you are able to save for one month or six, if you do need to dip into your emergency fund, don't worry — that's what you saved for!
