What is an emergency fund?
An emergency fund is money you earmark for emergencies. This money needs to be fairly liquid -- that is, you need to be able to access it quickly and easily.
Emergency funds help you overcome the following:
- Job loss
- Medical emergencies
- Unexpected car repairs
- Necessary house repairs
Sure, the fund can cover other types of emergencies. Your emergency fund exists to help you overcome unplanned events of all sorts. But an emergency fund should not be used to cover your semi-annual car insurance payments, or for holiday gifts. Those expenses are predictable, and payment should come from other sources.
Why do I need an emergency fund?
Think of an emergency fund as a self-funded insurance policy. The policy covers you when you're in a pickle. But instead of paying an insurance company for coverage, you're paying yourself forward.
Example No. 1: Job loss. You lose your job. You draw from your emergency fund to pay living expenses until you find another source of income. You have enough saved to maintain your typical living standards for three to six months -- longer, if you reduce expenses.
Example No. 2: Car repairs. You know your car is going to rack up a lot of mileage. You contribute to your emergency fund in anticipation of expensive mechanical issues down the road. When the bill comes due, you're able to pay it without selling long-term investments or taking out a loan.
An emergency fund is especially important when you don't have family members who can help you in a pinch. Feel safe knowing that if you need cash quickly, it's there, ready for spending.
How much do I need to save?
Many things, such as income and recurring expenses, determine how much you need saved in an emergency fund. Most experts recommend setting aside three to six months' worth of expenses. However, if you have a job title like freelancer or gig worker, or you work on commission, you might want to set aside even more.
To figure out the exact amount you need, add up necessary monthly expenses like rent, utilities, and food. Then multiply that number by three to six months. So, if you usually spend $3,000/month on essentials, you would save $9,000 for a three-month emergency fund. You would save $18,000 for a six-month emergency fund. This is tougher -- you must save more to meet your goal -- but it gives you more money to withdraw in tough times.
Ultimately, how much to have in an emergency fund is up to you. How much do you need for your bare necessities? Use our calculator below to estimate how much you should save for a six month emergency fund.