As much as we’d like to think that emergencies won’t happen to us, they do. And when they do, we need to be prepared. That’s where emergency funds come in - they act as a safety net that protects us from unexpected expenses. But how much should you save? How do you even calculate your emergency fund goals? In this blog post, we’ll go through everything you need to know about setting up an emergency fund, from how to calculate your savings needs to the best practices for making sure you’re properly protected.

What is an Emergency Fund?

Before we dive into how much you should save, let’s first define what an emergency fund is. Essentially, it’s a reserve of money that you’ve set aside in case of unexpected expenses. These can range from medical emergencies and job losses to unexpected car repairs or appliance breakdowns. An emergency fund exists to help you pay for such expenses without having to dip into your regular monthly budget or dabble with debt.

Having an emergency fund is essential to being financially stable and secure. Without one, you’re more likely to run into debt or have to rely on credit cards to cover expenses. And that’s not a situation that anyone would like to find themselves in.

A cartoon piggy bank with a band-aid around its waist.

How much to Put In Your Emergency Fund

There are two general rules of thumb when it comes to determining how much money you should save in your emergency fund. One rule is to have three to six months’ worth of living expenses saved up. Another is to save at least $1,000 as a minimum. However, these numbers are not set in stone, and they may not work for everyone. And while saving is easier said than done, you should try to save as much as you can to secure your emergency fund.

You may want to personalize your emergency fund based on your income, expenses, and needs, especially if you’re self-employed or work on commission. Other things to consider when setting up your emergency fund include your job stability, household size, potential risks, and expenses that fall outside of your regular budget.

Three to six months of living expenses is a good place to start, but it should not be the limit of what you are willing and able to save.

A stack of coins next to a plant, showing the growth of your emergency fund.

How to Calculate Your Savings Needs

To calculate how much you should save in your emergency fund, you need to first determine your monthly expenses. This includes rent/mortgage, food, utilities, transportation costs, insurances, loans etc. Add all of these costs together and multiply them by three to six months to arrive at a savings goal.

However, if you’re self-employed, work on a commission basis, or have a fluctuating income, you will need to calculate your average monthly income and expenses for the past six months to develop an accurate savings goal.

Remember to include any irregular expenses such as car repairs or medical bills when calculating your savings goal.

It’s also important to remember that an emergency fund is a long-term saving, so you don’t need to save the full amount from the get-go. Start small, with a few dollars every week or month, and build up gradually.

A calculator with the word "calculating" flashing above it.

Tips for Successfully Saving for an Emergency Fund

Now that you know how much you should save, how do you go about doing so? Here are some tips to help you save successfully:

  • Set a savings goal, but make sure it’s realistic. You don’t want to set a goal so high that you’re unable to achieve it.
  • Set up a separate savings account for your emergency fund. This will not only help you keep track of your savings, but it will also prevent you from using the money for something else.
  • Make saving automatic. Set up an automatic transfer from your checking to your emergency fund account on payday to make sure that you consistently save money without even thinking about it.
  • Look for ways to reduce expenses. You can cut down on eating out, switch to a cheaper cable or streaming subscription, or unsubscribe from memberships you don’t use that much.
  • Sell items you don’t need. You’d be surprised at how much you can make selling items you no longer need, want, or use.
  • Put any windfalls into your emergency fund. This includes tax refunds, bonuses, inheritances, and gifts.

A hand putting coins into a piggy bank with the word "savings" on it.

Conclusion

An emergency fund can save you from having to go into debt or incur high-interest credit card debt. Saving for it may seem daunting, but it’s necessary for financial security. Determine how much you should save, and start saving slowly by cutting down on unnecessary expenses or adding windfalls to your savings. With a savings plan and dedication, you will be well-prepared to handle any situation life throws your way.

A group of people standing together, with a rainbow in the background, indicating the feeling of security and stability that comes with having an emergency fund.