How Much Money Should You Have in an Emergency Fund?

You get a flat tire on the way to work.

Your son broke his leg.

You unexpectedly get laid off from your job.

There are countless ways that life can surprise us and we have to be prepared. We all know that we need an emergency fund, but how much should we be armed with? The experts all have different opinions, but one thing I’ve noticed is that just about all of them are recommending more than they used to!

Once upon a time, a fully-funded emergency fund was recommended to be about three months’ worth of expenses. There’s no magic number for that; it’s different for everyone based on your necessary expenses. (Though, we know our beginner emergency fund should be $500-$1000, depending on your income.) In recent years, we’ve heard that we should have three to six months’ worth. This is what Dave Ramsey teaches, and it certainly is a good goal to aspire to.

But there are other opinions out there. For instance, financial advisor Suze Orman would have you save eight months’ worth of expenses, while I was just reading that many experts now advise that you should have nine months to one year’s worth saved! That’s quite a jump from the old three month rule, isn’t it?

Why the change?

The biggest factor seems to be the unemployment rate in America. With the financial hardships of our current economy leaving many companies wanting, millions of Americans have found themselves out of work for at least six months according to the United States Bureau of Labor Statistics, and much longer in some cases. Unemployment can come out of the blue and surprise us, and we just can’t afford not to save.

So, how do I know how much I need?

Like I said before, everyone is in a different situation. You will want to take time pore over your checkbook and bank statements (yes, you’re supposed to read those!) and list every expense you can think of, from the mortgage and groceries, to gasoline and doctor bills. Also, look at how much spending you do that isn’t necessary that you could prune. This will help you to better estimate how much you need to save. For example, if you need $4,000 per month to get by, then that’s $24,000 for a six-month fund or $36,000 for nine months, and so on.

There are other important factors to consider as well. Are you single? Do you have kids? Are you a homeowner, or are you self-employed? For instance, a one-income family might want to consider saving more because if one income stream is lost then all is lost, whereas a couple who both work would have a secondary income to fall back on. Or if you’re self-employed, you’ll probably need to save more because you’ll have business expenses on top of your normal living expenses. But the key to remember is that you should never underestimate. If anything, I’d say err on the side of caution and save just a little bit more than what you feel comfortable with.

Where should I put it?

Our friend Dave Ramsey suggests keeping your emergency fund in a high-yield Money Market account. These accounts limit the number of transactions you can make per month (so it’s less tempting to dip into it for non-emergencies), and also allow you to write checks off of the account for convenience. Ally Bank offers good options for no-risk savings like this, and is personally where I keep mine.

Others suggest laddering CDs to mature at different times so that you can earn more interest, and some funds will always be coming available to you. This option is riskier as you never know when you’ll need more than what is available and then have to pay a penalty for closing a CD before maturity.

Remember, your emergency fund isn’t an investment: it should be liquid. It can be tempting to earn more, but you want this fund to be available to you at a moment’s notice, because you never know when that moment will come.

So, how much money do you have in an emergency fund? Leave a comment and let us know!