How Much Emergency Savings is Needed?

An emergency fund is a separate savings account used to cover the cost of an unforeseen emergency. In a time of market volatility and rising prices, you may be wondering just how much emergency savings is needed. While there are educated recommendations, the answer really depends on your individual situation.

A survey conducted by Forbes Advisor reported that the “majority of Americans depleted emergency savings during the pandemic.”  In another detailed report on Emergency Savings and Financial Security, the Consumer Financial Protection Bureau found that nearly a quarter of consumers (24 percent) have no savings set aside for emergencies. The report also found that 39 percent have less than a month of income saved for emergencies.

Emergency Savings Recommendations

Financial experts typically recommend you have enough savings in a dedicated emergency fund to cover three to six months’ worth of living expenses. As we mentioned above, many people depleted their emergency funds during the pandemic. Depending on the type of job you have and your expenses, you may need more than the recommended amount. The amount is dependent on your income level, as well as your comfort level.

When to save more for an emergency

You lack job stability.

If you are a contract worker or a gig worker, you may need to save more as you may be lacking job security. You may also want to save more if you work in an industry where job security is threatened by a recession, outsourcing, new technology, or downsizing.

You are retired or about to retire.

An adequate emergency fund is key to a comfortable retirement. Many retirees are finding it increasingly difficult to meet the rising costs brought on by inflation. Having enough savings in the event of an emergency is critical to a comfortable retirement.

You or someone in your family has ongoing medical issues.

The cost of medical care, especially in the event of a serious illness, can be overwhelming. Emergency savings can help you cover insurance deductibles and other treatments that insurance doesn’t. If faced with costly medical bills, save as much as you can when you can.

You are a single worker.

Dual-income families have more stability. If one worker loses a job, chances are there will still be one income coming into the household. If you are a single worker and lose a job, you lose your income. For this reason, six months or more of emergency savings is recommended for single workers.

You are a small business owner.

Small business owners and other entrepreneurs should really save enough to cover one year of business expenses. How much you save might also depend on how easily your business could pivot and adapt to changes in the market. In the event of an emergency, or something like the pandemic, how long would it take your particular business to bounce back? Answering these questions will help you determine how much you should set aside.  

Saving for an emergency

While emergencies can’t always be predicted or avoided, having an adequate emergency savings fund can relieve some of the financial burdens when dealing with these unforeseen events. The size of your emergency fund will depend on your expenses, your life situation, your dependents, and also your income.

You should put your emergency savings in an interest-bearing account, such as an interest-bearing savings account or a money market account. Check our Spirit Financial Credit Union or your local credit union to learn more about your savings options. Your goal should be to tap into this account only in the event of a financial emergency. What necessitates an emergency? Things like an expensive and unexpected home or vehicle repair, medical bills for an unexpected illness, or monthly expenses in the event of loss of a job.

When building your emergency fund, set up automatic transfers of a portion of each paycheck directly into your dedicated savings account. Once you’ve hit your goal, let it stay untouched so it’s there in the event of an emergency. You’ll have the cushion you need to survive a time of financial hardship. 

Looking for ways to find extra money in your budget to save? Read our blog “Best Apps to Help You Save Money.”