How much savings should I have? Emergency fund calculator

Unexpected expenses are just that — unexpected. You can’t anticipate your car breaking down when it was running fine last week; you can’t predict your dog needing a costly trip to the vet after eating something it oughtn’t have. These circumstances can happen to anybody at any time, and when you need to cover urgent bills and costly repairs out of pocket, it can derail your finances.

Yes, credit cards and loans may be accessible to help cover a financial emergency. However, products like payday loans are risky at best, while reputable options like loans and credit cards aren’t always available. Plus, with either option, you risk going deeper into debt and facing the additional cost of interest payments. In other words, there’s no substitute for savings.

Having an emergency savings fund provides both financial and psychological security. You have enough set aside to cover a surprise expense, which gives you peace of mind that you’ll be able to stay afloat no matter what life throws at you. Here, we’ll explain how much savings you should have, why it matters, and realistic tips for how to get started.

The basic rule: three to six months

The standard rule of thumb is that you should have three to six months’ worth of living expenses saved up at any time. It stems from the idea that you may need a buffer after facing an unforeseen event that puts a strain on your finances, like losing your job or receiving a surprise medical bill.

So, how do you determine what you should have saved up? Use our simple calculator to add your monthly expenses.

Use this number as a starting point, but feel free to come back and use it again if you remember other items. Keep in mind that you may need slightly more or less than this amount based on your unique circumstances.

Adjusting Your Emergency Fund Based on Your Situation

Whether you need closer to three or six months’ worth of living expenses in your emergency fund will vary based on your circumstances.

For instance, if you have a job that provides a stable income, three months of expenses may be appropriate. But, if you’re self-employed or have seasonal work with irregular income, you might want to save more.

Naturally, whether or not you have dependents also impacts your savings needs. A single individual may not need as much in their emergency savings fund as a person who is the family’s sole provider with three children in the home.

We could go on and on about the multitude of factors that could make your circumstances different, but you get the point. The key thing to keep in mind is that you should account for every expense you can think of in order to make your savings target as accurate as possible.

Starting From Zero

If you’re building up your emergency fund from scratch, it may not be practical or possible to put away three or six months’ worth of expenses at once.

Instead, focus on setting aside a little bit from each paycheck to build up your savings gradually. Set a goal for how much you’d like to save by the end of the year, and divide that amount by the number of paychecks you expect to receive to determine how much you need to allocate from each one. This can help you stay on track and get closer to your target savings.

If you have other financial priorities, like paying down debt, you may not have a ton of extra cash after each paycheck to put in your savings fund. However, try to stay consistent with saving what you can with each paycheck. This will help you stay motivated as you watch the number in your bank account continue to go up.

Where to Keep Your Emergency Fund

Prioritise keeping your emergency fund in a savings account that’s easy to access. In an urgent situation or emergency, you may need to make a payment right away, so you don’t want your funds to be locked into a long-term investment account.

Some conventional wisdom recommends storing it in a high-interest savings or money market account where the funds can grow on their own. However, this may not be practical if the account imposes certain restrictions like limited withdrawals and ATM access, minimum balance requirements, or maintenance fees that take away from the growth potential.

In an ideal scenario, you’ll find a high-yield savings account that offers convenient and quick access to your cash while also earning a good amount of interest while it sits unused.

Common Emergency Fund Mistakes

Once you’ve established your emergency fund, your work isn’t completely done. There are some common mistakes to avoid that might negate your efforts.

When things are going well, it may be tempting to raid your emergency fund for non-emergency expenses like travel, shopping, or other non-essential spending. Again, you never know when a surprise expense will arise, so keep yourself accountable and only use the fund for emergency situations. It helps to store your emergency fund in a separate account from what you use for daily spending.

You can also fall into the trap of keeping too much money in your emergency savings so that you’re unable to pursue other financial goals, like paying down debt or investing in your retirement fund. It’s also quite common for people to save too little, thinking their situation is more stable than it is. Thus, following the recommended three to six months rule will help you avoid either scenario.

Signs Your Emergency Fund Needs a Top-Up

It’s a good idea to review your emergency fund every now and then to make sure it still supports your life circumstances and current economic conditions. If you’re getting ready for a major life change, like quitting your job, moving, or starting a family, you might need to increase your funds to account for the added responsibility and uncertainty. Plus, your living expenses will likely increase over time with standard inflation, so you may need to add to the fund accordingly.

When the time comes to tap into your emergency fund to cover an unexpected expense, bill, or repair, you’ll need to build it back up afterward to keep yourself protected from future surprises.  Follow the same process as you did initially, dedicating a portion of your income to steadily restore its balance.

The bottom line: Being prepared is always worth it

Getting in the habit of saving can be challenging if it’s not something you’re used to. However, making small but consistent contributions to your emergency fund can help you reach your savings target while still supporting your other financial goals. Unexpected bills and financial emergencies are a fact of life, but an emergency fund can give you the peace of mind that you have some cash to fall back on while you weather the storm.

An emergency savings account is always a good start. However, in extreme circumstances, it still might not be enough. In cases like that, you may need to turn to a bank that offers reputable personal loans. However, loans are dependent on approval. An equally important part of ensuring your financial safety is maintaining a healthy credit score so that you can access credit when you need it.

Just like building an emergency savings account, building your credit score takes time. The best time to start building your credit score, like your savings, is now. While you’ll have to build your savings on your own, the Pave app can help you build your credit score.

Pave helps you protect your credit score from damage by monitoring your upcoming bills so your credit score never takes a hit from missed payments. On top of that, Pave reports your timely payments, helping you establish a strong payment history—the most important factor influencing your credit score.

Ready to get started? Take the first steps by downloading Pave today.

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