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How Much Should You Have In An Emergency Fund?

Hanna Kielar4-minute read
August 19, 2021

When it comes to setting up your emergency fund, there are a variety of factors that you should consider, like any debt you may have and any major financial responsibilities like mortgages, business expenses and kids.

The main and perhaps most important rule to keep in mind is that you should have between 3 and 6 months’ worth of basic living expenses in your emergency fund.

How Much Should An Emergency Fund Be?

The standard rule of having 3 – 6 months’ worth of living expenses in your emergency fund is recommended by many financial experts. 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.

There are essentially two different ways to calculate monthly expenses. Some follow the standard rule of saving up 3 – 6 months of their salary, while others calculate it as just monthly expenses, or the amount they’d need to pay the necessary bills in the event of a loss of income.

Let’s take a look at an example. If Jordan makes $4,500 each month but spends $2,000 on gas, food, groceries, utilities and a mortgage payment, they’d aim to have between $6,000 and $12,000 (roughly 3 – 6 months of $2,000 monthly spending) saved in an emergency fund.

If Jordan wanted to save up 3 – 6 months’ worth of salary, they should aim to have $13,500 – $27,000. 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. You may consider saving up salary instead of expenses if you have a number of other responsibilities to pay for – perhaps a mortgage, the expenses of running your own business or a family member with an expensive medical condition.

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How Much Is Too Much For Your Emergency Fund Amount?

It isn’t a question of having “too much” in your emergency savings, but rather how much you should continue to save for an emergency budget (after you hit a nice baseline, of course).

Below are some 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 most likely yes, because credit cards accrue interest at a much higher rate. The average credit card interest rate is currently around 16%, which is way higher than the average savings account interest rate of 0.06%.

This consideration is really only for people who have a sizable 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 it does make sense to use your fund to pay down debt. For example, Sam has $20,000 in an emergency fund, but close to $9,000 in high-interest credit card debt. Sam has a steady job, zero kids, and rents their apartment. This makes them a good candidate for using some of their emergency fund to wipe out the debt.

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 studies show that the average employer match is around 3.5% 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

Have you fully funded your emergency fund, but you’re still not contributing to retirement or perhaps saving up for a down payment on a home? 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 about six 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.

Keeping your emergency fund safe should be a top priority. A savings account is your best bet when it comes to where you should keep your emergency fund.

How Much Should You Have In Savings?

While opinions vary on the amount of cash an individual should keep in savings, it’s best to stick with the standard rule of 3 – 6 months’ worth 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 a few business days depending on what bank you use.

Although many people don’t utilize it as much, 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 a flat tire, for example.

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.

The Bottom Line: How Much Emergency Fund You Have Depends On Many Factors

If you have a nice emergency fund, you should first congratulate yourself. It’s something that some people don’t have. 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.”

To learn more about personal finance issues like this one, check out our personal finances Learning Center.

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Hanna Kielar

Hanna Kielar is an Associate Section Editor for Rocket Mortgage focused on personal finance, recruiting and personal loans. She has a B.A. in Professional Writing from Michigan State University.