We all hope that our emergency fund will never be used.

It’s there for those unexpected emergencies that life throws at us, to cover the gaps in income and help you get back on your feet as quickly as possible.

But how much money should you have set aside for this rainy day fund?

Today we’re going to look at the question of how much you should have in your emergency fund, and what factors to take into consideration.

An emergency fund is a savings fund that ideally can cover three to six months of your living expenses.

For those who want to be even more careful, you can aim to build an emergency fund that’s about 12 months’ worth of income.

However, you don’t want to go beyond this because the interest rates in most savings accounts do not keep up with inflation rates.

So your money is actually losing value.

That said, when it comes to liquidity, nothing quite beats cash in the bank.

Even if you have money stashed away in a certificate of deposit (CD), you may be charged a penalty/fee if you wish to withdraw your money early.

So, having a savings account is best for an emergency fund.

Do note: avoid saving your money in a checking account. The interest rates on these accounts are even more paltry.

How much do you need?

The classic rule of thumb is that you should have 1-3 months’ salary saved up as an emergency fund – so £4000 if you earn £20k a year, for example.

However, there are some people who argue that this isn’t enough and recommend six months’ worth instead.

Or maybe even 12!

However, there are also some people who think that six months’ salary in the bank is an unrealistic goal.

If you owe money on credit cards or other financial products, for example, it can be very difficult to get hold of this cash if an emergency arises.

For others, paying off debts can take priority over saving. You could also find that once your debt repayments are taken into account, the amount you’re left with after bills and living costs simply isn’t enough to set aside anything meaningful for emergencies!

Related: Methods to reduce credit card debts.

So how much should you save?

The answer isn’t straightforward – it’s dependent on your own situation and what other commitments you have (if any) – so it’s vital to consider all angles before coming up with a number that’s right for you.

What about other expenses?

Another consideration is the other financial commitments you have; if you’ve got credit card debts, for example, it makes sense to tackle these first before putting money aside to use in an emergency.

This way, at least your monthly repayments will be more predictable and it’ll be easier to budget.

What about inflation?

Don’t forget that your emergency fund is likely to need topping up over time – you’ll probably need more money in there as time goes on,

Interest rates are currently very low, but if and when they rise it could make sense to put some money aside now (ideally with a high-interest savings account or ISA) for these eventualities; if you’ve already got three months’ salary saved up then this will be less of an issue.

It should be able to cover some months of expenses.

So let’s look at other factors involved n your emergency savings

• how much money do you earn?
• What other commitments do you have (and what sort of monthly repayments can you expect)?
• And how much can you save, given what’s leftover after your expenses and debts have been paid?

Answering these questions will help you determine how much money you should ideally set aside in emergency savings.

And don’t forget that it’s a good idea to keep a little extra on top as a buffer for those unexpected events

Emergency Savings what amount is enough

So what amount is enough? I would say have emergency funds of at least 2 months worth of expenses, in case of a job loss or something else happens. It’s better to have more than less.

So if you can afford it I would suggest saving three to six months’ worth.

Where to keep an emergency fund

After you’ve decided how much emergency savings you need, where do you keep your funds?

I suggest not to keep it under your mattress because you have to think about inflation.

I would recommend high-interest savings accounts or ISAs, where you can get good returns on your money.

Look for a good high-yield savings account and start putting away money now so you can have some peace of mind if anything happens.

Emergency fund calculator

An emergency fund is a great idea if you don’t want to struggle with debt.

I suggest working out how much money you need for the emergency fund amount based on your monthly expenditures, living expenses plus another buffer of 5-10% just in case.

Once you’ve worked this out, try putting the amount into an interest-bearing account (ideally one that’s tax-free) and start building up this emergency cash hoard now!

How much should I put in my emergency fund?

Six months of living expenses are the minimum, but that’s only if something small happens.

If it’s a big disaster, like you lose your job or have a major medical expense, then even six months might not be enough.

But six months is definitely your first goal – and I would suggest building up over time to 12 months’ worth of income so you won’t have to touch your retirement investments.

An emergency fund isn’t just about being prepared for disasters; there will inevitably be unexpected life events that require some temporary lifestyle changes until they’re resolved, such as an unexpected car repair.

how big of an emergency fund do i need?

“If you can’t imagine living without your income for three months, then you need to beef up your cash reserves

So let’s look at the factors involved: how much money do you earn? What other commitments do you have (and what sort of monthly repayments can you expect)? And how much can you save, given what’s leftover after your expenses and debts have been paid?

Answering these questions will help you determine how much money you should ideally set aside in an emergency fund. And don’t forget that it’s a good idea to keep a little extra on top as a buffer for those unexpected events”

When should I use my emergency fund?

The first thing to remember is that your emergency fund should only be used for true emergencies.

If you are using your savings because you have made a choice, this is not an emergency.

And if the incident was caused by negligence on your part, it might not be an emergency either.

Is my job safe?

Another big factor in determining how much money you will need is knowing exactly where you stand in terms of job security.

If your job is at risk, you will need more money in your emergency fund in case the situation becomes untenable and you are forced to seek work elsewhere.

What would my expenses be?

If your income is very secure, you can afford to have less ​money set aside for emergencies than if it isn’t.

For example, if you earn $3,000 per month, but only $1,500 comes into your bank account each month because that’s all you require to manage on, then this tells us that there is a surplus of $1,500 per month which can go towards building up an emergency fund.

But if most months there is only enough money coming in for necessities…then you will need to build up your savings account more quickly.

What stage is my career in?

Another factor that can determine how much money you should have in your emergency fund is the stage of your career.

If you are still establishing yourself – for example, by having a short contract or working on a smaller salary while you get experience and training under your belt – then it might be better to keep more of your income than if you were established and secure with a long record of high performance.

Is my partner’s income secure?

Your financial situation is only as strong as its weakest link, and this means that even if you earn enough to cover all of your expenses and save some money for an emergency fund, if the person closest to you doesn’t have a regular income then things become very tricky.

If your partner has no job or is in a position where they are likely to lose it soon, then you will need more of an emergency fund than if their situation was secure.

What about my other debts?

If your expenses include a lot of money going towards debt, such as on credit cards and personal loans, this also reduces how much you can afford to put aside for emergencies.

According to financial experts, it’s best to pay off all outstanding debts first before building up your savings account – but not everyone feels that this is possible!

You can calculate how much money you’ll need in an emergency fund by considering all of these factors together with your lifestyle choices –

  Once you know exactly what sort of expenses are likely to arise in an emergency, then you can set about building up your savings.

Emergency funds should never be used for anything other than genuine emergencies. If you start dipping into this money when there isn’t any urgency, then it defeats the purpose!

Why do I need an emergency fund?

A a well-stocked emergency fund is essential for meeting life’s unexpected challenges.

Without one, many people have to resort to credit cards, selling their belongings or borrowing from family and friends.

All of these options can be expensive or even disastrous in the long term.. The point of an emergency fund is that it keeps you from going into debt when something goes wrong.

Without savings, you’re forced to take out a loan at high-interest rates just to handle a sudden surprise expense.

Emergency funds are important for providing stability during uncertain times.

Can I dip into my emergency fund?

Most financial experts advise against using your emergency fund unless there is an actual emergency – and even then, you should use as little of this money as possible.

Experts advise keeping enough of a safety net so that you can handle short-term emergencies without having to resort to borrowing money or selling possessions.

If you don’t have at least six months’ worth of savings on hand, then your family’s lifestyle will become more risky and uncertain the next time something bad happens.

What is an emergency fund calculator?

An emergency fund calculator is a tool that you can use to determine how much money you need in an emergency fund.

After entering some information about your monthly income and expenses, the calculator computes the size of the appropriate savings account based on what it deems to be a sufficient amount of money for emergencies.

The basic idea is that this figure should be at least six months’ worth of living expenses – which means having enough saved up so that the loss of one income won’t create any serious financial problems.

How do I determine what my monthly expenses are?

The equation for determining your monthly expense is:

Monthly Expenses = Fixed Costs + Flexible Costs.

Fixed costs are expenses that remain the same every month.

You should calculate these numbers first.

These include rent or mortgage payments, utilities like electricity and water, groceries, home supplies (like toilet paper and laundry detergent), insurance/bills, car payment/gasoline money, etc.

Flexible costs are expenses that aren’t fixed but you know they’ll occur during the next three months – so including them will help give you a more accurate view of how much you need in your emergency fund.

How to save consistently

The biggest obstacle that most people have when it comes to saving is that they just don’t have enough money left over. Once the bills are paid, they barely have enough to even last them until the next paycheck.

So how do you save when you only have enough to get by?

Here’s the problem, in a nutshell, don’t have high expectations in the beginning. The finance books will tell you to put aside 10% of your income and to ‘pay yourself first.

The hard truth is that sometimes even 10% is too much when you’re struggling to make ends meet. If your income is $2,000, 10% of it will be $200. Many people can’t save this much. They need it for their bills.

SO WHAT DO THEY DO?

THEY DON’T SAVE!

Effective savings strategies

For starters, you must create a budget for yourself and follow it. Set aside money for the needs, bills, etc.

You may wish to delay expenses on items that are mere ‘wants’ until you’ve set aside about 3 months’ worth of income. It’ll be tough and will require discipline, but delayed gratification here will ensure that you save up an emergency fund fast.

You’ll also want to go through your expenses with a fine-toothed comb and eliminate all unnecessary expenses such as magazine subscriptions you don’t use, branded items, cable channels you don’t watch, and so on. 

Trimming your expenses is one of the easiest ways to find more money to save.

Another way to save more is to EARN more. You may wish to take on a side job like driving Uber on your days off or starting a business online, etc.

The more you earn, the more you can save. While this might be a bit of a drag, you won’t need to do it forever. Once you have saved enough in your emergency fund, you can stop working yourself to the bone.

In fact, just 3 months of a side income might allow you to save up enough to make up at least half of your emergency fund. The rest you can top up with your monthly savings.

Slashing bills

If you’re in debt, use the ‘debt avalanche method to pay off your outstanding bills. Start off by paying the debt with the highest interest rate first. Focus on it while paying the minimum on the rest of the debt. 

Once the highest interest debt is paid off, you can use the money you normally paid towards it and pay off the next highest interest debt over and above the minimum you were paying.

When you do this, you’ll be reducing the amount you’re paying for interest. As your debt diminishes, you’ll have much more money to save in your emergency fund.

In conclusion…

Building an emergency fund is not rocket science. Spend less and save more.

Over and above that, you can also earn more and save more. It’ll take time. Getting started is ALWAYS the hardest part, but once you gain momentum and see the amount in your savings account increasing, you’ll be motivated to save more.

That’s really all there is to it. Once you have about 6 months of income saved up, leave it in your savings account and do NOT touch it.

Many people dig into their savings and deplete it all over time. Avoid using your emergency fund for anything else but an emergency.

Once your emergency fund is done, you can open another savings account and start saving up until you have enough to deposit into a certificate of deposit, which has a higher interest rate.

From then on, it’s just a matter of making your money grow with wise investment vehicles and aim to retire in comfort. But it all starts with you having an emergency fund.

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