Did you know that many millennials don’t have any money set aside to cover an emergency? That’s right: 46% of young Americans ages 18 to 24 have $0 in their savings account, according to a survey by GOBankingRates. If your emergency fund amount is hovering around $0, we’ll help you figure out how much you should have stashed away and discuss simple ways to start adding to your emergency fund.
What is an emergency fund and why is it important?
An emergency fund is a dedicated stash of money set aside to help you cover unexpected expenses, like medical bills or urgent car repairs—or perhaps a bigger obstacle, like losing your job.
Most people keep their emergency fund in a savings account instead of a checking account. The separation makes it easier to monitor your emergency savings amount and reduces the temptation to dip into it for a non-emergency expense. Plus, money in a savings account is easily accessible, and the average savings account earns about 0.6% interest—not a lot, but better than nothing.
An emergency fund is also considered separate from any savings you may have for a longer-term financial goal, like making a down payment on a house, going on vacation or buying a new TV.
Having an emergency fund is key to maintaining your financial stability in the event of an unforeseen challenge. It helps you weather the storm without having to turn to expensive loans that can be difficult to repay—like payday loans—or having to rely on friends and family for help.
How much should you have in your emergency fund?
The most common rule of thumb is three to six months’ worth of essential living expenses (though some experts advocate for eight or nine months). That includes money for housing, food, insurance, utilities, transportation and debt. If you’re not sure how much you spend each month on these essentials, it’s time to build a budget and find out!
Still, three to six months of expenses is a pretty big range—so here are a few things to consider when deciding how much you need in your emergency fund:
- What does your household look like? How many sources of income are there, and how many dependents? If there is just one source of income, it may be wise to set more aside in your emergency fund. Also, if your income relies heavily on commission or you are self-employed, you might want to aim for a higher amount.
- Does anyone in your household have an ongoing medical condition? If yes, experts advise that you save extra money for medical emergencies.
- Do you want to be able to cover some discretionary spending items? If you suddenly lose your job, would it be important to continue covering a child’s music lessons or sports expenses? If yes, you’ll need to set a higher target.
An emerging savings calculator can help you examine different scenarios.
If your emergency fund is somewhere near $0, it can be daunting to think about covering multiple months’ worth of expenses—so some experts recommend setting a lower initial target, like two weeks’ pay or $1,000. Once you achieve that goal, you can start to work toward hitting the three-month mark and beyond.
How much money should you save each month?
Here, the common rule of thumb is 10-20% of your net (after tax) income. It’s usually easiest to think of this on a per-paycheck basis. For example, say your regular take-home paycheck is $1,000. That means you should set aside at least $100 (10%) of each paycheck for savings. Generally, the first priority for savings is to establish an adequate emergency fund. Once you’ve accomplished that, you can start to dedicate the $100 toward saving for retirement, vacation or new car.
If this feels daunting, remember that something is better than nothing: Even saving just 1% of your income can make a difference. Putting $10 a week into your emergency fund will add up to more than $500 in a year. Use our free savings calculator to see how quickly your savings can add up to reach your goals.
How can you start adding to your emergency fund?
According to money expert Dave Ramsey, one of the quickest ways to jumpstart your emergency fund is to sell something. If you have toys, exercise equipment, spare power tools or furniture, consider setting up a yard sale or offering items for sale online.
Here a few other quick tips for revving up your emergency fund:
- Take a fine-tooth comb to your budget - Are there any unused subscriptions or memberships that could be cut? Find them and put that money toward savings.
- Earn extra income - Working an extra job can be stressful—but doing it for just a few weeks or months could make a significant difference in your emergency fund and peace of mind.
- Make it automatic - Set up automated transfers or deposits into your emergency fund account.
- Contribute loose change and small bills: - If you use mostly cash, these spare amounts can add up quickly.
RISE is dedicated to helping hardworking Americans build better money habits. Check out our collection of free, interactive tools for setting savings goals and managing debt.
