How much should I be saving for an emergency fund?

In a previous post, we discussed how we wanted to build an emergency fund prior to contributing to our Roth IRA. The philosophy behind this was we didn’t want to be taxed when contributing to the Roth IRA and then lose the money when we pull out the principal/initial amount we put in. Remember, retirement accounts are to be used for retirement, barring extreme emergencies.

So, what is an emergency fund to be used for and how much should you have saved up?

An emergency fund is to be used for unpredicted financial burdens which you face i.e. job loss, medical/dental emergency, unexpected car or home repairs, unplanned travel for emergencies etc. It should cover from 3 to 6 months of expenses if you were to lose your household income.

The easiest way to calculate your monthly expenses is to look at your last few months budget. If you don’t have a budget, we will talk about why should have one in a future post! Regardless, you should be able to guestimate what your last few months of expenses are by looking back at your last bank statements.

Example:

Let’s say your monthly after-tax household income is $3,200 if your single and $6,400 if you’re married.
Since an emergency fund is used for only true expenses, e.g. rent, groceries, monthly bills, etc. we will say a single person’s true expenses are around $2,500 and for the married couple it is $5,000.
$2,500 x 3 months = $7,500 required for a single person and $15,000 required for the married couple

Honestly, if you were being super conscientious about your saving you could probably stretch that amount to 4 months or longer. The thing is, in emergencies, the last thing you want to do is be stressing yourself out more where money is concerned. That is why an emergency fund is a great thing! It allows you to have a plan for when the unexpected happens and keeps you from making bad decisions, like maxing out a credit card with a 19% interest rate on it.

Now $7,500 for a single person or $15,000 for a married couple isn’t going to appear in your bank account overnight. It will take some time to save that amount. Don’t allow yourself to feel like you have to drop everything and start saving specifically for an emergency fund. But I do think having these numbers in mind allows you to decide what proportion of your savings you want to contribute toward the fund versus retirement accounts.

For Braden and I, we are planning to save the first five months and then reflect on how much we have saved and what we want to contribute to our emergency fund versus Roth IRA. For you, it might be a goal of $3,000 and then slowly contributing more over time. You are the master of your financial ship! So take charge and start making a plan today!

Let me know your thoughts on an emergency fund! Do you have one? How long did it take you to save for it? Is your emergency fund in a high yield savings account? Comment below!

Links to further reading:

https://investor.vanguard.com/emergency-fund/