Your Emergency Fund: How Much Is Enough?

Life, like the financial markets, can take unexpected turns.

Financial emergencies assume many forms: job changes, pay cuts, medical emergencies, and home or auto repairs are just a few. You need a reserve of cash to fall back on.

How much is enough? Most experts recommend an emergency savings fund equal to three to six months' worth of living expenses. Why aim for three to six months' worth of expenses? Planning for a worst-case scenario will help you easily cover smaller emergencies—replacing the hot water heater, for example.

If you have questions about how much you need, consider consulting a financial planner. Be sure to take into account whether you have children, carry a lot of debt, or have insurance coverage that could help you in some emergencies.

Here's how to get started.

Make It Easy

  • Set aside an account, or open a new one, dedicated to your emergency fund. Bank savings accounts or money market funds are good choices. Whatever you decide on, be sure it lets you make convenient deposits and is easy to access in an emergency.
  • Note that some financial institutions offer promotional programs with an attractive rate or other incentive. See if one of these makes sense for you—an incentive could help your savings grow faster.
  • Consider automatic transfers into your emergency fund account on a weekly, biweekly, or monthly basis. Whatever schedule you choose, stick to it. You won't have to think about it, and you'll save before you can spend. Best of all, when you make saving a habit, you won't miss the money as easily, and you'll be surprised how quickly it adds up.

Make It Manageable

When you find it hard to save money, one trick is to start small. Even $5 or $10 a week can add up in the long run. It may take more time to reach your goal, but if you start with an amount that makes sense in your budget and stick with it over time, you can get there.

Move Up Over Time

After a few months, try increasing your regular savings amount by $5, $10, or more if you think you can afford it. When you get used to that amount, increase it again. Over time, you'll be saving more than you thought possible.

 

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