The Emergency Savings Account Fund: How Much Is Enough?

By April Dykman

Learning about savings accounts is an important first step in getting your financial ducks in a row, and one of the savings goals that should top your list is the all-important emergency fund.

Emergency funds are what you can draw upon when something unexpected happens that costs a decent chunk of change. This could be anything from your kid breaking her arm to paying a deductible after a freak hail storm pummels your sedan.

Without the emergency fund, unplanned events such as these might require you to put the bill on a credit card, which means you'll pay interest if you can't cover it by the time the statement arrives in the mail. Once you start paying interest, the original emergency becomes more and more expensive.

Calculate Your Magic Number

When thinking about an emergency fund, it's a good idea to have a target goal in mind. The experts typically recommend three to six months of living expenses, but that is a general rule, and emergency fund needs aren't one-size-fits all. Three to six months is a reasonable cushion should you lose your job or incur medical expenses, but it's important to figure out what number would work best for you, taking into account your individual finances and situation.

Here's how to calculate your number:

  1. Figure out your barebones monthly expenses. These are bills like rent or mortgage payments, utilities, and food that are obligations or necessities. If you have any expenses that you could cancel, and would cancel, on short notice in the event of an emergency, leave those off the barebones expense list. Those discretionary monthly expenses might include subscription services (such as a cable bill) not under a contract term, dining out, and pricier forms of entertainment. A good place to start gathering this information is by looking at your bank statements from the last six months and calculating average spending in each category.
  2. Subtract side income. Do you write a blog that makes $250 per month or have a sewing business that nets $400 on a regular basis? Subtract that side income from your expense total.
  3. Find your three-month number. Multiply your barebones monthly expenses by three to get a three-month emergency fund goal. This is a good base point.
  4. Consider your insurance coverage. If you lost your job, what would it cost to get health insurance? Do you have a high deductible on most of your insurance coverages? That means you'll want to save a bit more. If you are lacking insurance in some areas, factor that in as well, since you'd have to pay out-of-pocket.
  5. Evaluate your job situation. What is the outlook for your industry? If you think it would take five months to find a job, aim for at least that much in your emergency fund. If your skills and experience are in high demand, you can consider saving less.

You also might bump up your number if you are the sole breadwinner in a family, since your job is more critical than that of someone who could depend on a partner's income to float the family finances.

Opening a Savings Account for Your Emergency Fund

Once you have a target goal, compare savings rates and make sure you're using the right type of savings account. You'll want easy access to your money if indeed there's an emergency. You can go with a traditional bank or credit union, or open an online savings account, which may offer better savings rates. Note that online-only banks often take two or three days to transfer your money.

Be sure you are comfortable with how you access your money as well. Do you want to be able to write checks or use the ATM, or is that not important? It's also a good idea to check the highest savings rates out on the market before making a decision on an account or a bank, since rates can vary greatly from bank to bank.

What to Do When Your Goal Seems Impossible

If your target number seems impossibly high, don't give up. Set a small goal, maybe just one month of expenses, and build your emergency fund from there. Set up an automatic monthly transfer into your emergency fund savings account and throw any windfalls (raises, gifts, tax returns, etc.) toward building your savings. It's more important to get started today than to hit your goal in record time.