You might say Matt Matheson is the perfect picture of stability.
As a full-time educator, he enjoys great benefits and job security. He also runs a successful freelance writing and blogging business. Heâs married with two healthy children, âone whoâs potty training right now, which is the biggest âemergencyâ I typically have to face on a daily basis,â he said. And yet, Matheson is no stranger to financial disasters.
Over the last seven years, Matheson estimates his family has averaged one $1,000 emergency every year. âOne time it was the water heater, and another it was an unfortunate incident involving our laptop and some piping hot coffee (it didnât end well for the laptop),â he said. âWeâve had unexpected deaths in the family requiring expensive flights, car repairs that went way beyond what we had budgeted for and an iPhone die an untimely death in a mug of hot tea.â
The one thing that saved his familyâs finances each time? An emergency fund.
Matheson said having emergency cash on hand made covering these expenses way less stressful. âIt also gave me a sense of financial empowerment and pride knowing that I had planned and executed a strategy to protect my family from financial hardships,â he said.
But despite the many benefits of having an emergency fund, many people donât. In fact, nearly a quarter of Americans have no emergency savings at all and only 39 percent could cover an emergency of $1,000.
âItâs not a question of if youâll have an emergency, itâs a question of when.â
– Rachel Cruze
Maybe that includes you. If so, donât worry â itâs never too late to build up an emergency savings account. Hereâs how much you should aim to save.
Whatâs the right amount for an emergency fund?
Depending on whom you ask, the âperfectâ emergency fund can come in different sizes. But one thing all experts agree on is that you need something set aside for unexpected expenses. âItâs not a question of if youâll have an emergency, itâs a question of when,â said Rachel Cruze, a New York Times best-selling author and personal finance expert. âItâs important to build an emergency fund so that youâre not tempted to rely on debt when life happens. And trust me, it will happen!â
The generally accepted principle for an emergency fund is three to six months of after-tax living expenses, according to Mike DâAndrea, a financial planner and chartered financial consultant. He also said those funds should be saved in a stable, liquid interest-bearing account. That means you shouldnât tie up your emergency savings in the stock market or illiquid assets like property; it should be readily available in a savings account that still lets you earn a bit of interest, too.
And although three to six months of expenses is the general standard, that might not be the right amount for everyone. Often, the size of your emergency fund should be based on your particular lifestyle and financial situation.
Hereâs a look at how much you should have socked away if you fall into one of these circumstances.
How much to save ifâ¦
Digging yourself out of debt can be a vicious cycle. You put every dollar you have available toward paying it off, and just when youâre about to become debt-free, a major expense hits. Now you have to borrow money again to cover the cost.
Thatâs why you should focus on building a small emergency fund before you think about tackling your debt. âIf you have debt, the first thing you need to do is build a $1,000 starter emergency fund,â Cruze said. âHaving this emergency fund in place will help to avoid the temptation to go further into debt to cover any surprise expenses.â Once youâre truly debt-free, you can go back to focusing on fully funding your emergency fund.
If you have a partner or family member who contributes to the household income, financial emergencies can be easier to manage. But if youâre the sole breadwinner, âthat income is more vulnerable,â DâAndrea said. âSix months would be the ideal minimum liquidity reserve in this situation.â
Your income is inconsistent
If you work seasonally, on commission, a contract or freelance basis, or rely on bonuses for compensation, your income likely fluctuates month to month. It can be harder to predict your income and expenses. In this case, itâs a good idea to have a bit more set aside for emergencies. âSome of those individuals may feel more comfortable with six to 12 months of accessible funds,â DâAndrea said.
âThe benefits of self-employment are vast and for another letter, but one of the benefits that are typically lacking are, well, benefits,â DâAndrea said. Working for yourself can make it more difficult and expensive to get the same benefits you would under a group plan, such as disability insurance and life insurance. âAlso, you are likely to be responsible for other peopleâs income and may have to forgo paying yourself to pay staff.â For these reasons, DâAndrea recommends setting aside at least six monthsâ worth of living expenses so you have more flexibility and peace of mind while running your business.
How to get your emergency fund started
Building up an emergency fund from scratch might seem overwhelming at first. But if you focus on taking small steps, your fund will grow over time. After all, the longer you wait, the longer it will take. Here are a few things you can do to get started right away.
1. Follow a zero-based budget. According to Cruze, the easiest way to build up your emergency fund is by having a solid budget. âI recommend doing a zero-based budget, which means that your income minus your expenses equals zero each month,â she said. âTell every dollar where to go.â By following this method, youâll quickly see the areas where youâre overspending and could be doing something better with your money, like building an emergency fund. Cruze uses an app called EveryDollar to manage her budget; you can also try others such as Mint, YNAB or Mvelopes.
2. Increase your income. Thereâs only so much scrimping and saving you can do, but thereâs no cap on how much you can increase your income. âMaybe you work a little overtime, pick up a part-time job or start a side-hustle,â Cruze said. âThere are probably household items you donât need that you could sell for some quick cash, too!â Remember that you donât have to hustle forever. The situation can be temporary as you work to build up your fund.
3. Create a separate account. Cruze said itâs important to separate your emergency fund from your day-to-day checking and savings accounts. âYouâll be tempted to spend it for non-emergencies and take a little bit here and there.â Instead, she recommends setting up a completely different savings or money market account. âThat way itâs accessible, but not so accessible that youâre tempted to dip into it when you donât really need to,â Cruze said.
4. Automate your savings. The physical act of transferring money from your checking account to your emergency savings account can be mentally painful. So painful that you might be tempted to skip a transfer when money is looking tight. But if you automate the process, either by setting up a direct deposit from your paycheck to your savings or an automatic transfer between bank accounts, you wonât have to watch it happen. In fact, you may not even miss the money.