How BIG should your emergency fund be?

Emergency funds are very popular in the personal finance world. They should be even more popular outside of the personal finance world. It’s always a very good idea to have a small savings stashed somewhere. My biggest dilemma is figuring out how much to have in our emergency fund. The interest rate in our savings account is really low. I only get 0.75% on the savings account at Capital One 360.

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Debt – How big should your emergency fund be if you are in debt? You should always strive to have $1000 in a savings account. $1000 will get you through most emergencies if you are a young 20 something year old. The last thing you want is to get into more debt if you have to pay an emergency bill to the doctor or vet.

After Debt – What happens after you get out of debt? Should you build your emergency fund to the equivalent of 6 months of expenses or 12 months? I have seen a lot of personal finance bloggers increase their emergency funds to $10,000 after getting out of debt. $10,000 will equal to about 3-4 months of expenses for us. 6 months of expenses equals to $18,000.

Investing – When you are young, it’s so important to build your investments so you take advantage of compound growth. Once you max out your retirement accounts, is it ok to have a $10,000 emergency fund, and then invest the rest into a brokerage account?

This is where our finances are right now. We can continue to build our savings account, or we can divert some money into a brokerage account.

What would be your advice for a 24 year old?

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20 comments

  • Your emergency fund should be reflective of your own personal situation. I think it’s ideal to brainstorm what some emergencies could look like in varying degrees and see how covered you would be. It also depends on how easy it is to replace your job. If there’s only two companies in your industry in your city, for instance, you may want to keep six to twelve months of expenses since you have fewer options, or you would have to pay moving expenses to relocate. If your work experience yields lots more opportunities, you could go with three to six months of living expenses. It depends on the individual and his/her risk tolerance and options.

  • Ultimately, I want a 30 year emergency fund. That way I can just retire at 62 😉
    With my small pension, social security, and Medicare, I think that would help me continue if my emergency funds ran out. Even though I am starting to invest again, 401k and Roth IRA, I am very suspicious of the stock market still. I wish us both luck regarding investing…

  • Ultimately, I think it’s a personal decision and should be based around your individual tolerance for risk and your immediate future plans. We typically keep about 3 months of living expenses in cash (in a savings account) and put all the rest of our money into taxable investments. We can always liquidate those investments in the case of an emergency if needed.
    Mrs. Frugalwoods recently posted…Should Our UK Reader Pay Off Her Mortgage?My Profile

  • I’m a couple years older than you and I own a condo, not a house. My goal at this point is to have a year of expenses liquid. I count half of my taxable stock index funds in that amount. A full year’s expenses is around $42,000 for me. I’m a fan of the tiered emergency fund approach since the likelihood of needing it all at once is reasonably low.
    Leigh recently posted…Managing a biweekly paycheckMy Profile

  • It’s so individualized. We are mid-30s and prefer to keep 6-8 months of expenses in our emergency stash. But we have a newborn and two rental properties. If you don’t have kids or rental properties (or a house), I think you can get away with substantially less, depending on how confident you are feeling about your employment situation.
    Dee @ Color Me Frugal recently posted…Parenthood: Are You Financially Prepared?My Profile

  • I think your Emergency Fund should be fluid and change as your financial picture changes and improves.

    At 43, we keep 9 months of expenses now. 10 years ago we were probably closer to 3-4 months.

    I can see us increasing to 12+ months as we go along.

    Once you get debt free, are saving in your traditional 401k/403b, filling your Roth IRA every year, then you can distribute extra dollars to various funds.

    I like that your emergency fund can really be whatever you want. I know some that have $0. They use their Roth IRA as their ER. Or they figure they can sell taxable investments. Whatever works I guess.

    Put the personal in personal finance. :-)
    Wade recently posted…Breaking Walking Downton Dead Bad AbbeyMy Profile

    • Thanks for the advice Wade! It’s hard knowing how much. This year we’re planning to have my 401K maxed, our IRAs, and have a pretty nice emergency fund, so I want to invest more in taxable account. Decisions, decisions!

  • I am a big fan of three months. But, if you are just starting to save and build an emergency fund, I would focus on those ‘must-pays’ –> your mortgage, car payment, utilities…. you can always minimize food costs, and put off non-essential purchases.
    Mrs SSC recently posted…WTF: I need HOW much to retire?My Profile

  • When l bought my first house, my emergency fund was basically credit cards. As l got older, l increased it to 6 months worth of expenses. The stock market crash depleted that and then some! I am not sure if you are able to invest in foreign stock exchange, but maybe it’s something to think about..you could get a global stock like Nestle or something in another currency, paying dividends..it really adds up since the dollar is likely stronger, meaning you can buy more shares..
    kemkem recently posted…Selling to Sold! – Our primary houseMy Profile

  • I generally keep very little cash for emergency funds. I have unused credit cards that I would substitute and then use the credit card float to pay it off before any interest is due. I can just rearrange my contributions in the short term to make sure I have what I need. That being said, most of the time we have the cash for a car repair, medical bill, etc. already in our checking account. We probably keep 3 months (or less) in cash at any given time. That is not ideal for most people, but it works for us.
    Vawt @ Early Retirement Ahead recently posted…10 Ways To Increase Retirement SavingsMy Profile

  • Eight personal finance bloggers shared their advice on saving emergency funds for a post I did a while back. The overwhelming feedback was to pay yourself first and accumulate at least 3 months of expenses. A few encouraged 6 months, but there are likely alternative, higher interest earning investments for savings beyond 3 months. Responses varied. As long as you can access the rest of your funds within the first three months, diversifying is smart. If $18k in an easy-to-access savings account limits financial stress, then it’s probably worth it. | http://bit.ly/Xl1fNq

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