An emergency fund is usually in a High Yield Savings Account (HYSA) that doesn’t have any fees. The “fund” is a set amount of money you never touch, except in emergencies.
The minimum is considered $1,000 since that will cover most things. A sudden dentist visit, a flat tire, or any other unexpected expense. There’s also extra peace of mind. An accident won’t immediately send you into debt. Backup cash is always useful.
Ideally, you already know what your budget is, and what your monthly expenses are. A “normal” emergency fund is 3 to 6 months worth of expenses. In case something major happens, like losing your job, the emergency fund will keep you stable for a while. A typical job search might take up to 6 months before your first new paycheck arrives. Job hunting, interviews, multiple-round interviews, onboarding, and other factors take time.
What’s best should be tailored to your individual situation. There isn’t a one-size-fits-all solution or dollar amount. An emergency fund could also be your annual health insurance deductible. This is typically $6,000 or so and varies by plan/region.
Keep in mind that emergency funds can be “too large.” With high inflation eating the value of your cash, and lost opportunity costs (money saved is money uninvested), you effectively “lose” money by holding lots of cash. Most people won’t have to worry about this, though.
If you have to sell something to access your funds, that isn’t an emergency fund. Your funds should be accessible immediately, or within a couple of days at most.
Some people treat high-limit credit cards as a one-month emergency fund. Because credit card bills aren’t due for about a month. However, that can potentially lead to overspending. People should never spend more than they have available. Plus, credit card interest rates are incredibly high, even compared to things like personal loans. One missed due date can be costly. Not to mention, late payments lower credit scores by a lot, for up to 7 years.
An emergency fund is risk management. Everyone has different risk tolerances.
Unfortunately, most people don’t have any emergency fund. A 2022 Bankrate survey found that “56% of Americans are unable to cover an unexpected $1,000 bill with savings.” A 2021 Bankrate survey found that 25% of Americans have $0 in savings, and 51% have less than 3 months’ worth of expenses. Few Americans have an adequate emergency fund. Only 25% have 6 or more months set aside.
In summary:
- Minimum fund: $500 to $1,000
- Small fund: 3 months of living expenses, or equal to your annual health insurance deductible
- Medium fund: 6 months of living expenses, or 2x your annual health insurance deductible
- Large fund: 12 months of living expenses
If you have a very high net worth, you may go as high as 24 months of living expenses. In this case you’d begin to use strategies like laddered CDs and treasuries.