An emergency fund can be a tricky piece of the personal-finance puzzle. You probably already know you should have one, but you might not know exactly how much you should have in it.
Is $500 enough? $1,000? $10,000? More? Less? How much is too much? How much is too little?
These are all good questions.
Unfortunately, emergency funds aren't a one-size-fits-all sort of thing. You and every other person on the planet are going to have a different ideal savings amount.
Luckily, it actually is pretty simple to figure out that ideal amount. To help, I've put together a free 3-month/6-month emergency fund calculator which will do most of the work for you.
Why You Need an Emergency Fund
If you've read my personal finance tips and the story of Jimmy, you already know why it's important to have an emergency fund. For those that haven't read that post, here's a TL;DR:
An emergency fund is a bit like a financial safety net.
Not only does having one help relieve some stress and anxiety, but it can also save you money. You won't have to worry about taking on debt in case of an emergency because you'll already have cash in the bank.
(If you want to learn more about emergency funds (what they're for (and not for), scenarios where they'd come in handy, etc.), check out my ultimate guide to emergency funds.)
Got High-Interest Debt?
If you've got something like credit card debt or a high-interest loan with a 10%-20% or higher interest rate, that's already an emergency in my mind. Focus on paying that off first, and then work on building your emergency fund.
If you need help, check out my guide to getting rid of credit card debt – it works for other debts too.
How Much Emergency Fund You Should Have
To start, I recommending building a $500-$1,000 emergency fund. That amount will cover small unexpected expenses, and it will be the base for your 3-month or 6-month emergency fund.
By the way, here's a fun fact:
According to a study done by CNBC, 60% of Americans don't have the savings to pay for an unexpected $1,000 expense. That means having a $1,000 emergency fund puts you ahead of the majority. Congrats! Don't stop there though.
Once you've successfully built your $1,000 fund, continue building it up! $1,000 is a great amount to have, but it's not enough to cover something big like job loss.
To figure out how much to save for your emergency fund next, enter your expenses into the simple 3-month and 6-month emergency fund calculator below.
Should I save for 3-months or 6-months of expenses?
I've included both amounts in the calculator for a reason. Most financial experts recommend 3-months of basic living expenses in an emergency fund, and for most, that will suffice.
In the end, it's up to you to decide how much to save. I've even heard of some people building 8-month emergency funds or even 12-month funds. It all depends on what you're most comfortable with.
Emergency Fund Calculator
As you fill out the boxes below, keep in mind that during a real emergency like job loss, you'll probably cut back on entertainment and other unnecessary costs until you find a new job.
Getting a negative number?
Uh oh! If the emergency fund calculator is telling you it's going to take -1 month to build your fund, that means your monthly expenses are either equal to or exceeding your monthly income! Double-check your values to make sure you entered everything correctly.
If everything is entered correctly and this is the first time you're realizing your expenses are equal to or greater than your income, well, you've got a bit of work to do. Check out my guide on how to start a budget to begin sorting everything out.
Where to Put Your Emergency Fund
I always recommend storing your emergency fund in an online savings account because:
- The interest rates are typically higher; and
- The money is out of reach and out of mind, meaning you won't “accidentally” spend it
So, which online savings account do you choose? Well, there are plenty of options, but I always recommend the Wealthsimple savings account. It's easy to set up, offers a nice 2% interest with unlimited free transactions, and has no account minimums and no low balance fees.
How to Build Your Emergency Fund Faster
There are two solid ways to build your emergency fund more quickly:
1. Save More Money
This is the most obvious solution, but it's not always easy. It can be especially hard to save money if you're living on a low income. If that's the case, and you truly believe you've already cut your expenses to the max, continue to method #2 below.
For those that are open to a bit of expense cutting, check out these posts:
- 60 of the Best Money-Saving Tips (Start here)
- 21 Straightforward Ways to Save Money on Groceries
- 28 Ways to Lower Your Electric Bill
- How to Save Money on a Low Income or Tight Budget
- 51 Money-Saving Hacks for Your Wallet
Another fun way to build up your emergency fund is to try a money-saving challenge like the 52-week challenge.
2. Make More Money
Ok, so you've already cut expenses but you still want to build your emergency fund faster. Time to start putting in some work to increase your income.
This is definitely harder to do than cutting expenses, but it's also a lot more rewarding in the long run. Starting and maintaining a successful side hustle can be life-changing.
If making more money is something you'd like to do, check out these posts:
- Superb Ways to Make Extra Money on the Side (Start here)
- 25+ Passive Income Sources to Make Money While You Sleep
- 5 Best Weekend Jobs for Extra Money (Boost Your Income!)
And that's really all there is to it! Emergency funds don't have to be complicated so make sure you start working on building yours. You'll be glad you did if anything does happen to go wrong.
Other than that, remember that if you can make or save even just $100 more each month, you'll reach your desired emergency fund amount much sooner.
Do you have an emergency fund yet? Are you going to start building one? Let me know!