4 Min Read
Imagine your car unexpectedly broke down, requiring a $600 repair. Or you got a surprise medical bill. What would you do?
One way to cover unexpected bills is to get out a credit card or borrow the money. But ideally, you’d have an emergency fund in place to cover you in situations like these.
You might know that it’s smart to have an emergency fund, but you might still be wondering how much to save. Essentially, it’s a good idea to have an end goal and a proper strategy in mind before you even start saving.
See if the emergency fund formula below is best for you.
What Is an Emergency Fund?
An emergency fund is a savings account that holds the money you might need to cover unexpected expenses.
Let’s be real. Whether we like it or not, we all face emergencies followed by unexpected bills at some point in our lives.
Here’s the list of some of the most common emergencies people face:
• A surprise medical bill
• An unforeseen home repair bill
• Car repair bill
• Job loss
Basically, an emergency fund is a money goal that allows you to cover unexpected bills without being financially affected or even live for a few months if you suddenly lose your job.
3 Benefits of Having an Emergency Fund
1. It keeps your financial stress down and gives you confidence that you can tackle issues without running into a financial crisis.
2. You’re less likely to spend on a whim. Setting up a separate emergency fund account, you’ll know exactly how much you have and how much you still need to save.
3. It keeps you from making bad financial decisions. Sure, you can borrow money when you have an emergency, but borrowing money comes with interest, fees, and penalties.
Remember, once you’ve set up your emergency fund, you should avoid touching it unless it’s an emergency.
But how much should you save to build up your emergency fund? Let’s find out!
Your Emergency Fund Amount
Now the question you’ve been waiting for - how much money should you save?
In fact, there’s no standard emergency fund formula. Instead, the right emergency fund amount for you depends on your lifestyle, monthly expenses, income, family needs, dependents, and other factors.
The three tips listed below will help you find the right emergency fund amount for you.
Start By Saving $1,000
$1,000 might still be a significant number for many people, but it’s a relatively achievable amount.
You should automate your deposits and put at least $25 into your emergency fund every week.
If you do so, you’ll be setting aside $100 each month, meaning you’ll have $1,000 in your emergency fund within 10 months. And by that time, one unforeseen bill won’t get you into a huge financial crisis.
Set Aside 3-6 Months Worth of Living Expenses
As a general rule of thumb, it’s recommended to set aside three to six months’ worth of living expenses. This type of emergency fund comes in handy, especially when something unexpected happens to your income source.
So if you typically spend $2,000 per month on various necessities like utilities, food, healthcare, you should save between $6,000 and $12,000.
Use the 3/6/9 Rule
Saving three to six months’ worth of living expenses gives us a huge range. Plus, even the lower-end is still a high amount. That’s why some people prefer to follow the 3/6/9 rule to discover an ideal emergency fund amount based on their needs.
According to the 3/6/9 rule, you should save:
1. Three months' worth of expenses if you have a consistent paycheck, no mortgage or dependents, and could move in with relatives if things go wrong.
2. Six months' worth of expenses if you have a steady paycheck but have a mortgage or dependents.
3. Nine months' worth of expenses if you have an inconsistent income (e.g., if you’re a freelancer) or if you’re an only earner in the family.
Even though it’s not the only formula, the 3/6/9 rule is still an excellent way to think about how to approach emergency funds. You should consider the ideal emergency fund amount for you based on the consistency of your income, your obligations, and whether or not you can get support from others.
What’s the Correct Amount for Your Emergency Fund?
As mentioned above, there are no one-size-fits-all formulas here. So don't worry about the amount too much. Instead, start saving—no matter the amount.
Put whatever you can spare into a high-yield savings account, whether it’s $10, $25, or $50 per week.
Final Thoughts: Should You Set Up an Emergency Fund?
We understand that setting up an emergency fund from scratch can feel overwhelming. It's challenging to save money, but it’s also equally hard to know how much to save.
But having an emergency fund is a wise decision. It can minimize your stress levels when an emergency occurs and let you cover your unforeseen bills and monthly expenses without going out of your regular budget.
And remember, building an emergency fund takes time and money management skills. And the sooner you start setting your money aside, the sooner you’ll get closer to being financially ready for the unexpected.
And that’s where Monorail can help. You can easily set up an ‘emergency fund’ savings goal within the app and begin automating your deposits today.
See how saving with Monorail can help you create an emergency fund.
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