Emergency Fund: How Much Money Should You Save for an Emergency?

When deciding to create an emergency fund, it is important to understand its main purpose, which is to give you a financial cushion for dealing with unexpected expenses or other financial emergencies.

During normal day-to-day life, unexpected expenses are bound to happen.

Everything from car or homeownership to raising a pet can carry the weight of potentially unforeseen expenses. Having an emergency fund can provide you with the peace of mind you’ll need to confidently face an unexpected expense.

In this article, we’ll explore why having an emergency fund is a crucial part of your financial well-being, how much money you should be putting aside and how frequently you should be adding to this fund.

Why do you need an emergency fund?

Put simply, the main benefit of having an emergency fund is being able to access money easily should you ever end up in a financially difficult situation.

For example, let’s say you take your car in for a routine inspection and the technician informs you that the transmission needs to be replaced. This type of expense could easily cost thousands of dollars and is something you’ll need to take care of immediately at the risk of further damage to your car.

An emergency fund can provide you with easy access to the resources you’ll need to cover this expense without significantly disrupting your day-to-day finances.

In addition to providing financial security, emergency funds also provide you with additional flexibility beyond using a credit card or taking out a loan.

If you do find yourself in a situation where you need to use a credit card, make sure you look for a card with a low-interest rate or a card that comes with benefits to make the best of a less-than-ideal situation.

Another benefit of emergency funds is that they can provide a safety net so you feel more comfortable making investment decisions with any funds above and beyond your savings.

Whether you’re new to investing or a seasoned investor, an emergency fund can be a useful first step for securing your finances today when considering the next step in your financial journey.

How much money should you save for an emergency?

The straightforward answer is that you should save as much money as you can up to the point where you feel safe with your nest egg.

Even a few hundred dollars can be helpful for mitigating the impact of an unexpected expense. If you find yourself in a situation where you need more money than you have saved, you can still use what you have and incur less debt than you would have otherwise.

For a standard benchmark of how much you should save, financial professionals will generally recommend saving up enough money to cover three to six months of your household's expenses.

Having three to six months of savings can provide you and your family with the capital needed during times of more significant or unexpected events, like job loss.

While this is a recommended amount, it is by no means a must-have, as everyone’s financial circumstances are unique.

To put it another way, think about how much you can afford to set aside in the context of your entire financial picture and your personal needs and goals. Some people may be comfortable aiming for one month’s worth of expenses, while others won’t feel safe until they have enough cash to sustain them for a year or more.

In practice, your emergency fund should exist to soften the blow of a financial emergency such as an unexpected expense or job loss.

For this reason, while three to six months of savings is generally the average, a better answer to the question of how much you should save would be “as much as you feel you need to, and then maybe a little bit more.”

What are the steps for creating an emergency fund plan that gets you to your savings goals?

When planning for your emergency fund, determine what your essential expenses are and build from there.

Calculate your expenses within a given timeframe

Creating a list of your regularly occurring expenses is an important first step as this can let you know what you need to be saving. Some common expense categories include:

• Housing (rent, mortgage)
• Utilities (electricity, water, internet, phone)
• Transportation and gas
• Groceries
• Insurance (home, medical, car)
• Household supplies
• Childcare or pet care
• Personal (gym memberships, entertainment)

Once you have your expenses categorized, calculate the total amount of what those expenses are on a monthly basis. Knowing what you would need to save monthly will help you multiply that by the number of months you’d like to save up to and have in reserve.

Use a calculator that tells you how long it will take to reach your goal

Savings calculators can be a great way of summarizing where you are and how long it will take to get to where you want to go. Look for saving tools that can help you determine how long it will take to reach your goal to assist in your planning journey.

For example, using Associated Bank’s “How long will it take to reach my savings goal?” calculator and plugging in a monthly spend of $5,000 for a family over a three-month period (which would be a $15,000 total goal) will tell you how long it will take to get to that desired amount.

Keep your emergency fund in an account that can grow your money

There are many account types that can keep your money working for you as you save up your emergency fund.

These account types can help you reach your goals even sooner. Money markets and Certificates of deposit (CDs) are just two of the options available to you, and each has its own items to consider:

• Certificates of deposits (CDs): These accounts generally offer better interest rates but require a fixed term. CDs often allow for more growth since your deposited money earns interest over time. When used for emergency accounts, it’s generally recommended that you build a CD ladder so you can have frequent access to your funds at higher rates.
• Money markets: Money market accounts allow for withdrawals on short notice should you need that option but you may not accrue as much as you would with a CD with a longer term.

Standard savings accounts are another option that keep your funds safe while allowing your balance to grow. It is worth noting; however, that these account types typically generate less interest than other options and may not be the best saving option for larger emergency funds.

Build an emergency fund over time with support

Simply getting started is an essential part of creating your emergency fund, and there is no one right way to do it. The easiest way to go about it is to determine how much you need to save and take incremental steps to get there.

When you’re looking at the entirety of your financial picture, note that an emergency fund is not the most important part, but it is something that can help give you peace of mind should you ever find yourself in a difficult financial position.

If you have any questions about the options available for saving and growing your emergency fund, or if you’d like to consult with someone on how to get started saving, give us a call at 800-236-8866, schedule an appointment or visit us at any of our Associated Bank locations.

We’d be happy to walk you through the basics of building financial security and protecting yourself from unexpected expenses in the future.