Discover how much savings you need in your emergency fund

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Devin Miller
September 21, 2023

So you’ve started an emergency savings account (ESA), and you’re ready to start contributing to it. What should your savings goal be? Finding the “magic number” to save for your emergency fund can seem like a complex equation with many variables to consider. If you’re not sure how much emergency savings you should have, you're not alone. 

With only 63% of American adults able to cover a $400 emergency expense without going into debt or selling a possession, according to a 2022 Federal Reserve survey, it’s clear that many people don’t have enough funds saved for that inevitable rainy day. 

Building a sound emergency fund is a cornerstone of smart financial planning, beyond simply setting up a critical safety net. Answer these six questions to help you figure out how much emergency savings you should have:

What are your personal expenses and lifestyle factors?

To arrive at an ideal savings amount, it’s important to first have a thorough understanding of your financial landscape. Start by taking stock of your monthly expenses. This might include: 

  • Housing (rent or mortgage)
  • Utilities 
  • Groceries/food expenses 
  • Transportation
  • Debt payments (credit card, student loans)
  • Childcare (if relevant) 

According to the U.S. Bureau of Labor Statistics, in 2022 the average American household spent $24,298 annually on housing alone. Your housing costs may be higher if you live in a more expensive area or have a larger home office setup. Let’s look at an example to put things in perspective:

Monthly expenses example

For an account manager living in San Francisco, their monthly expenses might look something like this:

  • Rent: $3,500
  • Utilities: $200
  • Groceries: $400
  • Transportation: $300 (including monthly BART pass)
  • Student Loan Payments: $350

Total monthly expenses: $4,750

Make sure to consider your specific lifestyle factors and personal circumstances in this equation. Here are some other potential expenses to consider:

  • Expenses from dependents (childcare, school fees, home health care for elderly dependents) 
  • Regular medical expenses, prescription costs, or specialized healthcare needs 

The average American spent $5,850 on healthcare costs in 2022, according to the U.S. Bureau of Labor Statistics. However, if you have chronic medical conditions, those costs could be much higher. 

Think of your monthly expenses as your financial baseline: the amount you absolutely need to have covered each month to get by. Knowing your financial "break-even point" can help you gauge how vulnerable you are in the face of an emergency.

Think of your monthly expenses as your financial baseline: the amount you absolutely need to have covered each month to get by. 

What is a realistic safety net for your circumstances?

When it comes to how many months of emergency savings you need, financial experts generally advise saving between three to six months' worth of living expenses at minimum. But this is just a broad starting point — which is why it’s important to consider your unique circumstances when deciding on an ideal emergency savings amount. Think about factors like: 

  • Job stability: Are you a freelancer or consultant who may be more prone to ups and downs in income?
  • The economic health of your employment industry: How healthy is your industry right now (think tech downturn, real estate crises, etc.)?
  • Your own physical and mental well-being: Are you battling any health issues that could impact your job status or incur extra medical expenses?
  • Responsibilities that may affect your earning potential: Are you, or do you anticipate, caring for ailing parents or relatives?

These lifestyle factors can all affect how much you truly need. For example, if you work in a volatile sector like tech startups, aiming for an eight-month cushion could be a safer bet.

The goal here is to build a safety net that is sufficient but not excessive. You want to cover your bases without hoarding resources that could be better invested elsewhere. After all, funds in your emergency savings account generally aren’t working as hard for you as they might be in investments.

What are the potential financial risks in your life?

While we can’t predict the future, we can certainly prepare for it — and that’s where emergency savings shines. Understanding the potential financial risks in your life will help you set a realistic target for your emergency fund. Some common financial risks include:

  • Job Loss. The COVID-19 pandemic taught us that even the most secure job sectors can experience upheaval. By May 2020, 23 million Americans had lost their jobs, according to data from Georgetown University.
  • Medical Expenses. An unexpected illness or accident can drain your finances rapidly. Just one trip to the emergency room could easily cost you thousands of dollars. 
  • Home or Vehicle Repairs. From a leaky roof to a car breakdown, these expenses can balloon quickly.
  • Natural Disasters. The risks of natural disaster have increased notably in recent years, meaning that you’re likely at risk regardless of where you live. A comprehensive study by Rebuild by Design found that 90% of U.S. counties experienced a federal climate disaster between 2011–2021 alone. However, if you live in an area that’s prone to flooding, wildfires, or hurricanes, it’s especially important to factor that into your savings goals.

When assessing risk, consider the likelihood of each event and its potential financial impact. Factor in extra expenses from there based on your unique circumstances.

Financial risk example

Let’s say you're an HR executive living in Florida — hurricane country. You would not only factor in standard expenses to your emergency fund, but also the potential costs associated with storm damage or evacuations. Even with homeowner’s insurance, you likely have a deductible of $1,000 that you’ll have to pay out of pocket before coverage kicks in. Factoring in potential transportation and lodging costs from evacuations, you add an extra $2,000 to your emergency fund amount.

How will you balance emergency savings with other financial goals?

Keep in mind that your emergency fund is one piece of a broader financial puzzle — so it’s important to strike the right balance between this immediate safety net and other long-term financial goals like: 

  • Retirement savings
  • Debt reduction
  • Purchasing a house
  • Education savings
  • Other investments (stocks or other asset purchases)

These are all important financial objectives, but an emergency savings account is the best place to start, as it will help you create a solid financial foundation which you can build upon to achieve your other fiscal goals.

Our recent SecureSave study found that only 27% of respondents had enough emergency funds to last them three months, while only 19% had enough to cover them for six months or longer in the case of a crisis. Suffice it to say that most Americans are still working to build that emergency cushion. The order in which you address your finances matters, so tackle emergency savings first before putting a significant amount towards other things like credit card or student loan debt.

Example of balancing your financial goals

A mid-level manager has student loans and no emergency savings. While it’s tempting to put extra income into debt repayment, diverting a large portion to your emergency fund offers a safety cushion, helping ensure you won’t incur more debt if an emergency arises. A realistic plan for this individual might look like:

  1. Contribute 70% of excess money each month to emergency savings, and the rest to student loan repayment and retirement savings.
  2. Once you reach your emergency savings goal of $15,000, lower contributions to 30% and increase loan repayment and retirement savings accordingly.
  3. As your student debt lowers, you can start putting more of your excess monthly funds into long-term goals like retirement contributions and saving for a down payment on a house.

The key is to remain flexible. This plan might work for you now, but as circumstances change, be prepared to adjust your financial projections accordingly. And as you hit various financial milestones—whether it's paying off a loan or receiving a significant raise—revisit your emergency fund to make sure it still aligns with your needs and risks. 

What income stability and support systems do you have access to?

Income stability and support systems play an influential role in shaping your emergency savings strategy. These systems can include: 

  • Unemployment benefits
  • Insurance coverage
  • Assistance from family

Only 26% of unemployed Americans actually received unemployment benefits in 2022, according to the U.S. Bureau of Labor Statistics. Check whether you’re eligible for unemployment benefits based on your current employment. Also add in other potential support systems like disability insurance or family assistance. Balancing these against your monthly expenses may help lower the total amount you need to save.

Example of income stability

You’re a marketing director with excellent health insurance and short-term disability coverage. Based on these factors, you could reasonably reduce the amount you need to keep in your emergency savings.

Before counting on a certain type of support, make sure to do your research. If you’re counting on state disability benefits, for example, make sure you understand the qualifying conditions and the payout period. If you're relying on family, have an open conversation with your loved ones to make sure they would be able to help if the need arose. It’s better to be prepared than to find yourself in a tough financial situation.

How often should you review and adjust your target savings amount?

Your emergency savings account isn’t a set-it-and-forget it activity. It's an always fluctuating fund that should evolve with your financial landscape. While it's comforting to hit that initial savings goal, remember that life is rarely static. Everytime your income or expenses change dramatically, it’s important to revisit your emergency savings strategy.

Even if nothing drastic has changed, a good rule is to review your emergency savings target once a year. Examine your monthly expenses, annual income, and any life changes like marriage, relocation, new baby, or job change. And remember, financial advisors are always available to give guidance and provide tailored strategies that align with your unique circumstances.

Your ideal emergency savings amount is unique to you

The ideal amount for emergency savings isn’t a one-size-fits-all figure, but rather a unique amount that you determine based on your unique circumstances, lifestyle, and financial goals.

Conducting a thorough evaluation of your monthly expenses, assessing the potential financial risks in your life, and understanding your available support systems will guide you in determining a safety net that’s realistic yet robust. And make sure to revisit your emergency fund goals annually, or whenever major life changes happen.

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Devin Miller

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