How much should I have in my emergency fund?

Many experts recommend saving three to six months’ worth of living expenses in an emergency fund.

But the amount you need may be different depending on your profession, lifestyle and any additional resources you have.

Unfortunately, about half of U.S. households earning $25,000 to $75,000 a year, and a quarter of those earning more than that, don’t have emergency savings, according to the Consumer Financial Protection Bureau.

Without a financial cushion to handle life’s unexpected events, folks are more likely to skip paying their bills or borrow money to cover unforeseen expenses, which could put their financial well-being at risk.

So how do you decide how much to save? Let’s explore some of the factors to consider.

• Decide how much to save
• Choose where you’ll keep your emergency fund
• When to use your emergency fund

Decide how much to save

Before you can decide how much to save, you need to figure out how much you’re spending. Start by tracking your expenses for a couple of months. Then divide your expenses into two categories: essential and nonessential.

Essential expenses include items like …

• Rent or mortgage payment
• Groceries
• Healthcare
• Utilities
• Transportation
• Insurance
• Recurring debt payments

Nonessential expenses include …

• Entertainment
• Dining out
• Vacations
• Any other discretionary spending

Add up the total amount you spend on essential items. That’s how much you need to cover your basic living expenses each month. It doesn’t include extra spending you could eliminate if you experience a true emergency. If you use the three-to-six-month benchmark, you’d need three to six times that amount for your emergency fund.

Don’t think you can save that much? Start by setting aside what you can. Even small amounts, when saved consistently, add up over time.

When you might want to save more

Three to six months’ worth of living expenses is a common recommendation used when saving for an emergency fund. But if you’re in a situation where you’ll likely need to rely on your savings from time to time — like the ones listed below — you may want to consider saving more.

• Sole earner in your household, with dependents — If others are relying on your income, it may be a good idea to have a little extra saved for whatever life throws your way.
• Irregular income — If you’re a freelancer, business owner or commission-based employee, chances are your monthly income has its share of ups and downs, making it difficult to budget for the unexpected. An emergency fund can help cover your expenses when you earn less.
• Working in an industry with a high turnover rate — If you have a greater risk of losing your job than most people, you’re more likely to need to tap into your emergency fund.

When you might want to save less

While having enough money set aside for an emergency is crucial to maintaining your financial health and avoiding unnecessary debt, you may choose to cap your emergency fund at three to six months in some situations, like those below.

• Your job is secure — If you work in a field where you’re unlikely to lose your job (teacher, government, etc.), you may not need to save as much for a rainy day (though it’s still a good idea).
• More than one source of income — If you have multiple sources of income and lose one source, you may still be able to cover your basic living expenses with your other income streams, giving you time to replace the lost income.
• Resources other than emergency fund — If you have additional savings elsewhere, you may have more options come emergency time.

Choose where you’ll keep your emergency fund

Because emergencies can occur at any time, it’s important that your money’s available and easy to get to when you need it. There are quite a few options for where to keep your emergency fund.

Consider low-risk options, like a savings account, money market account or Treasury bills.

And make sure to keep it separate from your other accounts. If you mix your emergency savings with other money, it’s too easy to spend on something that’s not a true emergency, like your dream vacation or that great pair of boots on sale. Instead, put away additional savings for those kinds of purchases.

When to use your emergency fund

When you talk about emergency funds, most people think about using it after a job loss.

And while emergency savings can help you cover your basic expenses until you find a new job, that’s not the only thing it can be used for. An emergency fund is meant to help you pay for life’s unexpected events — like unplanned car repairs or medical expenses — so you don’t have to skip paying bills, take out a loan or carry a balance on a credit card, all of which can have a negative impact on your financial health.

An emergency fund is not meant for discretionary expenses that you can plan and save for, like routine car maintenance or vacations. But if you do need to tap into your emergency fund, be sure to replenish it as soon as you’re able, so that it’s fully funded for life’s next emergency.

Bottom line

Having emergency savings can provide peace of mind, help you avoid debt and preserve your financial health. Many experts recommend saving three to six months’ worth of living expenses, but the amount you need to save may differ based on your profession, lifestyle and additional resources available to you. If you don’t have a lot of extra cash, start small and save consistently. Over time, it’ll add up.