Life is unpredictable and it’s likely that at some point in your life you will need to dip into an emergency savings account. Saving for a rainy day is a good practice for any responsible adult. This money can be used for unexpected expenses such as new appliances, repairs to your car, or even as a way to bridge the gap between jobs. It’s a good idea to have money set aside no matter what, because in some situations, taking the time to save isn’t an option. The question is, how much should you have in your emergency savings?
It might seem like this is a situation where the more money you have set aside, the better. And of course, you want to make sure that you have enough money set aside to cover major issues. However, if your emergency fund gets too big, you might be losing out on the opportunity for investment or other uses for that money. Below we’ve listed some rules of thumb for how you should approach setting aside funds for an emergency.
What is an emergency fund?
First and foremost, it’s important to understand that an emergency fund is not part of your regular savings or your nest egg. You shouldn’t think of it as a part of your savings for retirement or anything else. The money should be set aside strictly for emergencies. These could include unexpected medical bills, layoffs, or major car or home repairs. The emergency fund is not a stash of money that you keep for the year then use to go on a vacation. It’s something that you keep around in case you ever need it.
How much should your emergency fund be?
This depends heavily on your income, lifestyle, and dependents. Typically, the recommendation is to have between 3-6 months’ worth of expenses covered in your emergency fund. This might sound like a lot, but in the event of an emergency, you’ll feel better if you aren’t immediately feeling strapped for cash. You’ll also want to change the amount based on your circumstances. If you move into a nicer home, have a child, or get married, your expenses will change, and what once would have likely covered an emergency might not anymore.
What should your emergency fund cover?
The thing about emergencies is that you can’t always anticipate what they’ll be! However, as a rule of thumb, you should have enough money put away to cover the major expenses for a few months:
Health care (including insurance)
You don’t need to worry about expenses that you would cut out in an emergency like entertainment and shopping, but keep in mind that a lot of those day to day expenses can feel a lot higher if you don’t have steady income coming in. Don’t underestimate how much you’ll need to cover your expenses. If anything, overestimate what you’ll need.
It can seem impossible to save up that much money, but the important thing is to take it piece by piece. When you put away a little each month, it will add up quickly! And you don’t have to have your entire emergency fund squared away in a year. Make it a goal that you will save up a certain dollar amount and keep adding what you can afford until you hit that number. Then you’ll be all set if something unexpected happens!