Emergency Fund: What is It, How to Build One, and How Much to Save

In times of crisis, you don’t want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you’re protected when a financial emergency arises.

What is an emergency fund?

Your emergency fund is a pool of readily available funds that can help you handle emergencies or urgent, unexpected needs. An emergency fund can help you cover a big medical bill, for example, or get through a job layoff.

How much do I need in my emergency fund?

Most financial professionals suggest that you have three to six months’ worth of living expenses in your cash reserve. The actual amount, however, should be based on your circumstances. Do you have a mortgage? Children? Do you have short-term and long-term disability protection?
 
Other factors to consider include your job security, health, and income potential. The bottom line: without an emergency fund, a period of crisis, such as unemployment or disability, can cause financial distress for anyone.
 

How do I calculate three months’ worth of expenses?

Start by calculating your regular expenses. That should include your rent or mortgage payment, utilities, phone and WiFi bills, groceries, insurance premiums, transportation costs, minimum debt payments, and any other necessities.
 
Figure out how much money you would need to cover those expenses for three months (or six months, if you’d like to give yourself a bigger cushion). If you’re in the midst of paying for a child’s braces, include those expenses. If you’re saving up for a vacation, don’t include that – it’s not a typical expense.

The 3-6-9 Rule

Not sure how many months of coverage you need in your emergency fund? The 3-6-9 rule offers a general guideline.
 
Single earners with a steady income should save 3 months’ worth of expenses. Earners with dependents should have at least 6 months of expenses. Single people with irregular income should aim for 9 months. Those with both dependents and irregular income should have a savings goal of 12 months of expenses.

How to build an emergency fund

If you haven’t established a cash reserve, or if the emergency fund you have is inadequate, take these steps to eliminate the shortfall:

• Reduce your discretionary spending. At least for a while, you might choose to avoid eating out, going to the movies, and scheduling spa days. Once you’ve built your emergency fund, you can get back to those activities.
• Start small. If your emergency fund goal seems daunting, begin slowly, even if it’s saving just $25 per paycheck. You can always increase the amount later.
• Use payroll deduction at work, if available, to direct some funds into a savings account for your emergency fund.
• Get creative. To fast-track your savings, sell items around your home on eBay or start a side hustle.

Your emergency fund should be housed in liquid assets, such as cash (like a savings account) or assets that are easily convertible to cash.
 
Also keep in mind that in a time of crisis, you can use a credit line as a secondary source of funds. But beware that borrowed money must be paid back, often at high interest rates. So it’s best not to rely on credit lines as a primary source of emergency dollars.