One lasting effect of the coronavirus pandemic was to show us clearly how devastating it can be to suddenly lose income and not have savings. And even beyond a true economic crisis like losing your job, lesser financial emergencies also happen: your car breaks, you need to travel unexpectedly, your smartphone takes a bath. Those, too, can really throw you off track. So whether you think of it as an emergency fund, a rainy day account, a financial cushion, or an “uncertainty fund,” you need one. It’s one of the most important things you can do with your money. But exactly how much should you save into an emergency fund, and what do you do with that money? Here’s what you need to know.
How much to save in your emergency fund
At Ellevest, we typically recommend that you set aside three to six months’ worth of your take-home pay for emergencies. That can feel like a really big number, especially if you’re starting from scratch — and especially when you’ve got debt to deal with, too. So if you’re just starting out, we recommend starting small, with one month’s pay — call it a mini emergency fund. That will give you a bit of a cushion to protect you while you move onto your high-interest debt. Then later, when you’ve dealt with all credit cards and loans with interest rates above 10%, you can return to your emergency fund and fill out the remaining two to five months’ worth.
Three to six months is kind of a range, though, which is why deciding how much is right for you depends on two things: how much uncertainty you might have to face and your personal comfort level.
The more uncertainty you’ve got in your financial life, the bigger you’re going to want your emergency fund to be. For example, if you’re a single parent and own a fixer-upper, you’re probably going to want to aim for closer to six months’ (or more) of your salary saved up. (Also, respect.) On the other end of the spectrum, if you’ve been in a steady, salaried job for a while, share finances with someone (like a spouse), and have no dependents and no mortgage, three months is probably a safe goal for you. (Pains us to say it, but if you're self-employed, you should probably be aiming closer to nine months' income to help float you through those periods of uncertainty.)
But let’s say that, despite being in a stable, salaried job, and despite sharing finances with someone in a stable, salaried job, three months doesn’t feel like enough security for you. In that case, save more! These are just guidelines, so do what feels best for you. (Just don’t keep all your money in cash. We typically recommend putting some aside to invest after you’ve hit your personal emergency fund goal — here’s why.)
Once you’re clear on your number, three things to help you get started saving up. First: Make a spending plan that works for your real life. That’s the best way to make sure you’re prioritizing your money goals. Second: Work your way up, and set mini-goals along the way. Maybe your first goal is $1,000, and then one month’s expenses. And third: Pay down high-interest-rate debt — anything more than 10% for sure — before you save more than one month’s take-home pay. (Waiting too long to pay that debt off can really cost you. Plus, freeing yourself from minimum payments will help you save faster.)
Where to keep your emergency fund
This one’s a biggie: Keep your emergency fund in cash — not literally cash under the mattress, but in a bank account that you can access quickly and easily. One that’s insured by the FDIC (or the NCUA, if the bank is a credit union), meaning that your money’s protected by the government up to $250,000 if something were to happen to that bank. If you’re considering a money market account, note that those are different from money market funds, which are actually investments and not FDIC-insured. We also don’t recommend putting your emergency fund in a certificate of deposit (CD) or any other type of account that doesn’t let you make withdrawals whenever you want.
We also recommend choosing something separate from your everyday bank account. That can help you resist the urge to tap into your savings for non-emergencies.
How to decide whether to use your emergency fund
Definitely an emergency: Anything unexpected that you absolutely must pay for. You lose your job. You have unexpected medical bills. Your water heater breaks. You have to travel to see a sick loved one.
Definitely not an emergency: Things you want but don’t really need, or things that you could save up for. Think last-minute vacation plans or your annual insurance premiums.
But there’s also a gray area, and that’s different for everyone — here’s our best advice to help you decide what is and isn’t an emergency for you.
Saving up three to six months’ take-home pay, in cash, for emergencies only, is one of the earliest steps you can make if you want to take control of your financial future. (Wondering about the others? We’ve got you. Here are smart money moves to make at every age.)
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Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.