How Much Emergency Savings Do You Need?

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If your car breaks down unexpectedly or you’re laid off from your job, could you cover the expenses? A rainy day or emergency fund can help you navigate these unexpected events.

Life is full of unexpected events, and those events often have serious financial implications. Your car breaking down, an urgent surgery and the loss of a job can all make for unexpected bills and financial stress. According to Bankrate, 21% of Americans have no emergency savings at all. If you don’t have an emergency fund yet, now is the perfect time to start saving.

An emergency or rainy day fund consists of money you’ve set aside to help deal with the financial burden of unanticipated events. Having an emergency fund prepares you to cover these necessary expenses. It also gives you a sense of security, knowing that you have funds set aside if you need them.

In this article, we discuss how much emergency savings you need, what it should and shouldn’t be used for, and how you can start building your emergency fund.

What is an emergency fund used for?

An emergency fund is used for expenses that you don’t anticipate needing to pay for. These expenses are generally necessary, urgent and unplanned. In other words, they’re not included in your monthly budget.

Here are some expenses an emergency fund may be used for:

  • Medical bills related to a timely surgery or trip to the emergency room
  • Emergency car repairs or repairs after an accident
  • Emergency home repairs, like fixing a leaking roof
  • Basic expenses in case you lose your job
  • Essential travel to see a sick family member

What an emergency fund should not be used for

It’s important to only use your emergency savings for genuine emergencies, or you could easily drain the funds. While it may be tempting to spend the money that’s available, avoid using it on expenses that aren’t urgent and necessary. This way, you’ll have more money available to you when you need it most.

Here are some expenses an emergency fund should not be used for:

  • Shopping and gifts
  • Coffee and meals out
  • Nice-to-have home renovations
  • General travel and vacationVehicle purchases

Summary of what an emergency fund is and isn’t used for

An emergency fund may be used for:

  • Medical bills (like a surgery or ER visit)
  • Emergency car repairs
  • Emergency home repairs
  • Basic expenses in case of unemployment
  • Essential travel to see a sick family member

An emergency fund should not be used for:

  • Shopping and gifts
  • Coffee and meals out
  • Nice-to-have home renovations
  • General travel and vacations
  • Vehicle purchases

How much emergency savings do you need?

At a minimum, it’s best to have three to six months of your living expenses set aside for emergencies. This fund is large enough to help cover big expenses like medical bills, or basic expenses in case you need time to find employment after you’ve lost a job.

While three to six months of expenses is the suggested minimum, you’ll want in your emergency savings fund, it’s a good idea to put more money into this savings when possible.

If you’re self-employed, have a large family or have a chronic medical condition, there may be a higher chance that you’ll see larger, more frequent financial emergencies. A larger emergency fund can help. Additionally, having more emergency money tucked away is beneficial in case of a bad economy that makes it difficult to find work for many months.

How to calculate emergency fund amount

The first step in determining how much emergency savings you need is to calculate your basic monthly living expenses. These expenses include:

  • Housing
  • Debt
  • Food
  • Utilities
  • Transportation
  • Insurance
  • Other expenses

Start by adding these expenses up, and then multiply that figure by six to determine what your expenses are over a six-month period.

For example, let’s say that your monthly expenses are as follows:

  • Housing: $900
  • Debt: $200
  • Food: $325
  • Utilities: $150
  • Transportation: $150
  • Insurance: $175
  • Other expenses: $100

In total, your monthly expenses are $2,000. Multiplied by six, you’ll need $12,000 in emergency savings to cover six months of living expenses.

That figure may look large, but you can gradually build up your savings over time.

>>Related Reading: 5 Tips for Managing Your Checking account and Savings Goals

3 benefits of having an emergency fund

There are plenty of reasons to prioritize building your own emergency fund. Now that we’ve covered how much emergency savings you should have, let’s elaborate on three key benefits of having an emergency fund.

1. Ability to cover unexpected expenses

When you have an emergency fund, you’re better able to cover unexpected expenses—rather than forgoing them. This could potentially mean getting the medical care you need instead of putting off a necessary surgery. Or, it could mean getting your car fixed promptly instead of relying on public transportation or others to give you rides while you find the money to afford a pricey repair.

2. Improved financial security

With an emergency fund, you’re less likely to go into debt to pay for expenses. Instead of putting expenses on a credit card or taking out a personal loan , you’ll have the money to cover all or most of many expenses.

3. Peace of mind

Perhaps most importantly, having emergency savings gives you peace of mind. Only 16% of Americans are very comfortable with their emergency savings, according to Bankrate’s survey. Knowing that you have money set aside for emergencies can help reduce your stress when pressing financial needs occur. You’ll be better able to focus on resolving the emergency situation when you don’t also have to worry about how you'll pay for it.

>>Related Reading: 7 Tips for Dealing with Financial Stress

5 tips for building your emergency fund

If you’re starting your emergency fund from scratch, you’re not the only one. According to the 2020 Employee Financial Wellness Survey from PwC, more than one-third of full-time employees have less than $1,000 in their emergency funds. See how this breaks down generationally below.

Employees with < $1,000 in an emergency fund:

  • Gen Z: 62%
  • Millennials: 37%
  • Gen X: 34%
  • Baby boomers: 37%

The good news is there are many ways you can save more money and grow your emergency savings. Below are five tips for building your emergency fund.

1. Open a savings account

By putting your emergency fund into a separate savings account, you’ll be able to track exactly how much emergency savings you’ve accumulated. A separate savings account can also help you avoid spending emergency money on everyday expenses, while remaining accessible when you have a true emergency.

2. Set a savings goal

Setting a savings goal gives you something concrete to work toward, which may keep you accountable to regularly putting money into your emergency fund. The key here is to be specific with your goal. For instance, you may decide to put $20 from every paycheck into your savings account to build up your emergency fund.

You can always adjust your savings goal in the future, too. If you get a promotion, you may be able to put more money toward your emergency fund with each paycheck.

3. Identify areas where you’re overspending

If you’re having trouble coming up with extra money to put into your savings, take a look at your spending. Using budgeting apps and online finance tools offered through your bank helps you evaluate your spending patterns and see where you may be spending unnecessarily. By cutting back on expenses like eating out or buying coffee on your way to work, you have extra money to build your emergency fund.

4. Make saving easy

If you have to manually withdraw cash and transfer it over to your savings account each time you’re paid, you might forget or put the task off. Instead, look for ways to make saving easier. Consider setting up automatic, recurring transfers so you don’t even have to think about building your rainy day savings.

5. Monitor your progress and… celebrate

Keep track of the progress you’re making. Sign up for email or text updates of your savings account balance, and when these updates come through, celebrate the fact that your emergency savings is growing. In his book Tiny Habits, author BJ Fogg says celebration can actually help you build new habits. How? The act of celebrating brings a positive feeling, which helps you develop the habit quicker, a TED article explains.

Building an emergency fund takes time, but you deserve to celebrate the little steps you take toward improved financial security and peace of mind. Celebrating the little steps makes you excited about building your savings, which encourages you to keep up with the habit of putting money aside.

Discover more tips to reach your financial goals

If you’re ready to take the first step toward building your emergency fund or meeting another financial goal, Cadence Bank can assist. We’ll help you determine which personal banking services, including savings and checking accounts, are right for you. To learn more, get in touch with a personal banker today.

To discover more personal finance tips, check out our other insights and articles.


This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

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