How Much Should I Have in an Emergency Fund?

Financial emergencies can happen to anyone. Unforeseen circumstances like an accident, injury, or sudden job loss can quickly damage your fiscal health. While insurance can mitigate against sudden medical bills or auto expenses, an emergency fund is a vital mechanism to protect you and your loved ones from long-term financial harm.

According to the U.S. Federal Reserve, more than half (54%) of Americans in 2022 admitted to setting aside money for emergency savings or “rainy day” funds. However, around a third (32%) of people said they would struggle to cover an emergency expense of more than $500 with their savings.^[1]

But exactly how much should you have in an emergency fund, and how much should you try and save each month to secure a healthy rainy day fund? This article will explain.

How much do you need to save for emergencies?

As with any savings fund, the amount you can save will likely depend on your monthly income and expenditures. For example, if your household living expense each month is $4,000, your emergency fund will likely be based on how much it would cost for you to get by should your income dry up.

A Bankrate survey from December 2023 found that less than half (44%) of Americans can afford to pay for a rainy day expense of $1,000 or more with their savings; more than a third (36%) have more credit card debt than funds allocated for emergencies.^[2]

As a general rule of thumb, it is recommended that a person has three to six months' worth of day-to-day expenses (auto loans, rent/mortgage payments, utility bills, insurance, etc.) to cover themselves if they are unable to work or lose their job.

According to the Bureau of Labor Statistics (BLS), the average person in the U.S. earns $65,470 per year as of May 2023.^[3] Based on this, a comprehensive emergency fund could range between $16,367 (for three months) and $32,735 (for six months).

This should cover a sudden loss of income in the event of job severance or an illness/injury that prevents you from working. A fund should account for essential living expenses, including:

• Housing (rent/mortgage payments)
• Utilities (electricity, water, cable, cell phones, etc)
• Groceries
• Healthcare (medical bills, prescriptions, etc.)
• Taxes

In the event of an emergency to the extent where a fund is needed, you would likely need to cut back on non-essential expenses for a while. Though it may be tempting to dip into an emergency fund at times, this fund should also not be considered part of a "nest egg" or a long-term savings strategy.

How much should you put in your emergency fund per month?

While an emergency fund of $15,000 or more might seem daunting, it is always best to start small when it comes to saving.

Many Americans will consider auto repairs as an emergency expense that a fund could cover. According to the AAA, the average repair cost is between $500 and $600.^[4]

So it’s a good idea to consider this as a starting point for an emergency fund. If you were, as an example, to set aside $10 per week, a $500-600 fund could be yours within 12 to 16 months - just over a year’s worth of saving!

Another rule of budgeting to bear in mind is the "20% rule." According to Investopedia, the average consumer should aim to set aside around a fifth of their monthly income towards savings and paying off debt.^[5]

The average U.S. monthly salary, taken from BLS data works out at $5,455. If you were to save 20% of this - $1,091.16, a three-month emergency fund would be reachable in 15 months.

While this may not be possible for everyone, it is a good idea to set aside whatever you can once you’ve covered your monthly expenses to save for a rainy day.

Setting an emergency savings goal

As with all savings and investments, setting measurable goals and taking regular steps towards them — even if they might seem small at first is the best way to save money over time. While we can never predict what the future will look like, having any size of emergency fund for an unforeseen expense is going to be better than taking out a loan or burdening a credit card to pay for it.

Before setting an emergency savings goal, it is important to think about your current financial situation. You should consider:

• Your yearly and monthly income
• Your household’s yearly and monthly income
• The consistency of your household income
• Your monthly household expenses
• The stability of your job

If you are self-employed, the need for funds to protect yourself if you can’t work becomes greater as you are responsible for your own income. The National Association for the Self-Employed recommends that you set a goal for an emergency fund as much as you can while still in employment before taking the plunge on your own business.^[5]

It’s a good idea to keep your day job while working on your own business or side hustle until your business is generating enough income for you to live on in addition to having an emergency fund saved.

A savings goal will likely be based on your expenses, and how much you and your family would need in an emergency situation. While saving for half of your annual wage might seem daunting, try to start small. Even a $10 weekly transaction to a savings account can quickly add up and build interest over time.

Do you need an emergency fund?

Saving for a rainy day can give you and your family much-needed peace of mind; an emergency fund is the safety net that protects your household should the worst happen.

Just as you would invest in car insurance to protect against auto repair costs or health insurance to cover unforeseen medical bills, an emergency fund gives its investor the confidence to tackle any eventuality. In today’s unpredictable world, saving for a rainy day gives you one less thing to worry about.

Sources

1. Federal Reserve System: ‘Report on the Economic Well-Being of U.S. Households in 2022 - May 2023’ https://www.federalreserve.gov/publications/2023-economic-well-being-of-us-households-in-2022-expenses.htm
2. Bankrate: ‘Bankrate’s 2024 Annual Emergency Savings Report’ https://www.bankrate.com/banking/savings/emergency-savings-report/
3. U.S. Bureau of Labor Statistics: ‘Occupational Employment and Wage Statistics’ https://www.bls.gov/oes/current/oes_nat.htm
4. AAA: ‘Planning for Auto Maintenance and Repair Costs’ https://www.aaa.com/autorepair/articles/planning-for-auto-maintenance-and-repair-costs
5. Investopedia: The 50/30/20 Budget Rule Explained with Examples https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp
6. National Association for the Self-Employed: ‘5 Things You Need To Do When Starting Up A New Business’ https://www.nase.org/business-help/self-made-nase-blog/self-made/2019/07/30/5-things-you-need-to-do-when-starting-up-a-new-business

About the author

Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.

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