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How Much Should You Have In An Emergency Fund?

4-minute readFebruary 23, 2021

“How big of an emergency fund is too big?” The answer to this question depends on a variety of factors, including your debt and financial responsibilities like a mortgage, business, or kids.

Is Your Emergency Fund Too Big?

There’s the standard rule of having 6 – 9 months of living expenses in your emergency fund recommended by many personal finance sites. Most experts agree this is the amount that will help allay stress in the scariest of financial situations, like in the event of a massive home repair, unexpected job/income loss, or pricey medical emergency.

And there are two different ways to calculate monthly expenses. Some save up 6 – 9 months of salary, while others calculate it as just monthly expenses, or the amount they’d need to pay the bills in the event of a loss of income.

For example: Joey makes $4,500 each month but spends $2,000 on gas, food, groceries, utilities and his mortgage payment, he would aim to have between $12,000 – $18,000 saved in an emergency fund.

If he wanted to save up 6 – 9 months of salary, Joey should aim to have $27,000 – $40,500. Because this is such a large amount, many people aim to save up expenses only, and then move on to other financial goals.

The amount you should keep in your emergency fund depends on your comfort level, but you may consider saving up salary instead of expenses if you have a number of other responsibilities to pay for: a mortgage, running your own business, or a family member with an expensive medical condition, for example.

How Much Is Too Much For Your Emergency Savings?

It isn’t a question of having “too much” in an emergency fund, but rather what continuing to save for an emergency (after you hit a nice baseline, of course) keeps you from.

Below are the instances when you may be keeping too much in your emergency fund:

High-Interest Debt 

If you have a large emergency fund and a lot of expensive debt, you may be wondering if that money is better served paying off debt. The answer is yes, because credit cards accrue interest at a much higher rate. The average credit card interest rate is currently around 19%, which is way higher than the average high-yield savings account interest rate of 1 – 2%. 

But this consideration is really only for people who have a sizeable emergency fund saved up, enough to avoid going into credit card debt again if an emergency were to occur. Emergency funds are there to keep you from going into credit card debt, so you really need to tackle them both.

For example: Josie has $20,000 in an emergency fund, but close to $9,000 in high-interest credit card debt. Josie has a steady job, zero kids, and rents her apartment. Josie would be a good candidate for using some of her emergency fund to wipe out the debt.

As a bonus, she could replenish the money quickly as paying off the debt would free up high monthly payments.

Not Getting Your Company 401(k) Match

Saving up an emergency fund should never come at the expense of getting a 401(k) match if your employer offers it. A 401(k) match is factored into your total compensation package as an employee, so if you’re not saving enough to get it, you’re literally leaving money on the table. Recent research from Fidelity finds the average employer match is around 4.7% of an employee’s annual salary.

The solution here is simple: allocate enough each month so you get the match and then continue saving for your emergency fund.

Not Funding Other Savings Goals

Fully funded your emergency fund and still not contributing to retirement or perhaps saving up a home down payment? Ask yourself why. What emergencies are you continuing to save for?

While homeownership may not be the right choice for you, there are other things to save for besides catastrophic emergencies, like paying for your next vacation in cash or saving for your kid’s college fund.

And when it comes to emergency funds versus retirement savings, keep in mind the average stock market return from the last 20 years hovers around 7%. Again, this is 3 times higher than any high-yield savings account rate being offered today.

Where Should You Keep Your Emergency Fund?

The best place for an emergency fund is in a high-yield savings account that’s completely separate from the checking accounts you use for everyday spending. Yes, the interest rate is low, but the key here is accessibility. You want to keep it somewhere the cash is readily available if you need it.

How Much Cash Should I Have In Savings?

While opinions vary on the amount of cash an individual should keep in savings, it’s best to keep your 6 – 9 months in cash in a high-yield savings account just in case you really do need it ASAP. Transferring funds from one account to another isn’t problematic, but it can take 1 – 2 business days.

And here’s a radical thought: you can have more than one emergency fund. If you’re a homeowner, it may make sense to have an emergency fund for home maintenance and a separate one in the event of job loss. There’s also the idea of a “money cushion” – that $500 – $1,000 extra you keep in checking that can cover smaller unforeseen costs like a pet emergency or flat tire.

Once you’ve hit your targeted emergency fund amount, consider keeping your money in places other than a bank. Depending on your risk tolerance, these funds can be allocated into other high-interest savings vehicles like CDs, money markets, or various stock market investments such as stocks, bonds, or funds.

If you have a nice emergency fund, good for you for being really good at saving money! This puts you ahead of the majority of Americans; recent Bankrate data shows 28% of adults live life without an emergency fund. But, if you have to ask if your emergency fund is too big, the answer is probably “Yes, it is.”

For more articles like this one, check out our personal finances Learning Center.

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