How Much to Save in an Emergency Fund

How will you fund routine expenses if you can’t work? Do you have the cash to cover a large, unexpected auto repair or other unexpected expense? If reaching for a credit card is your go-to solution for emergencies, consider making a better plan: create an emergency fund that you can count on in a financial pinch. Emergencies, especially ones that impact your ability to earn a living, can drive up debt quickly. Yet, a Bankrate.com survey reports that 22% of U.S. adults have no emergency savings at all, the lowest percentage in 13 years of polling.

Job loss, recovering from an injury or needing to care for a sick family member are just a few of the common life events that can cut your income stream. Financial planning experts recommend setting aside enough to cover three to six months of expenses in an emergency fund. That amount may sound intimidating, but even a small emergency fund is better than no fund at all. Having just $1,000 set aside could smooth an unexpected financial bump.

As we age, we tend to have more financial obligations—and a greater risk of health- and family-related emergencies. If you’re under 25, you may only need one or two months of expenses in a fund that you plan to grow to equal three to four months of expenses by the time you’re 30. People over 40 should aim higher, and make a plan to save enough to cover six months of expenses in an emergency.

Setting up your emergency fund

Get started by setting up a dedicated emergency fund account, such as a regular savings or money market account. You want your emergency fund separate from other accounts so you’re less likely to tap into it for non-emergencies. The following strategies will help your fund grow quickly:

• Automatic transfers: Set up an automatic monthly transfer from your checking account into your emergency fund account. A $50 monthly transfer adds up to $600 per year.
• Deposit tax refunds: Receive a big refund from Uncle Sam? Deposit some or all of it into your emergency fund.
• Save your leftovers: Review your checking account at the end of every month, and transfer some of any remaining balance into your emergency fund.
• Share the wealth: Dedicate a portion of any income boosts, such as bonuses or financial gifts, to your emergency fund.
• Lower expenses: Review your spending and look for savings opportunities, such as eating out less or canceling services you rarely use.

Make a “keep out” sign

A rapidly growing fund can be a source of temptation. But an emergency fund is for emergencies— especially emergencies that cut income. It’s not for indulgences like vacations or buying a nicer car. Just as importantly, it’s not for making a down payment on a house or for investing. Save separately for retirement and major purchases.

Feel like you'll never reach your emergency savings target? You will if you make a plan and stick to it. Start today, commit to following one—or all—of the savings tips listed above and you'll be well on your way.