No matter your source of income, no matter how frequently (or infrequently) you get paid, no matter how stable your job is, everyone should have an emergency fund.
An emergency fund can be used to help cover your basic living expenses when your income has been reduced or even eliminated. That said, the amount of money someone should have in their emergency fund varies based on a number of factors.
For those in salaried positions with fairly secure employment, financial professionals recommend saving three months’ worth of basic living expenses. Those with less stable employment or individuals with variable incomes, however, must be a little more conservative with their savings. Experts recommend six months of expenses.
Our emergency fund calculator can help you determine the number of months of expenses, as well as the total amount, you should save in your emergency fund.
How to use the emergency fund calculator
The emergency fund calculator helps determine how many months of expenses you should have saved for emergencies. To calculate a specific value for your emergency fund, the calculator asks three questions regarding your income and expenses.
Average monthly expenses — This is the amount you spend each month on necessities like rent/mortgage, utilities, groceries, gas, and such. You can also include less essential purchases, like subscription services and dining out, but the focus should be those expenses you need to stay afloat.
Existing liquid savings — This refers to the amount of money you already have saved and ready to use should you lose your job. This number excludes your retirement savings, because there are tax consequences for pulling money from your retirement account.
How difficult would it be to replace your existing income? — For this question, you can choose one of the following four answers, but be sure to give a conservative estimate:
- Easy (3 months) — “I could quickly get another job with similar pay.”
- Average (6 months) — “I’m well qualified for many jobs but realize it may take time to find a new one.”
- Difficult (9 months) — “Jobs in my field and salary-level are limited or competitive.”
- Very difficult (12 months) — “I lack the right skills for the job market or am in an industry in which it takes a long time to land a new position at comparable pay.”
Once you’ve submitted your answers to these three questions, the calculator estimates the amount of money you should have saved in your emergency fund. Specifically, the calculator suggests two amounts:
- Amount needed to cover this time — This is the total amount suggested for your emergency fund, based on your monthly expenses and the number of months it will take for you to find a new source of income.
- Amount you need to save to cover expenses if you lost your job — This number is based on your existing liquid savings. It’s how much money you need to save to get your current savings up to the “amount needed to cover this time” number, the total amount suggested for your emergency fund.
Why do you need an emergency fund?
It’s no secret that the American economy has suffered in recent years. The Federal Reserve is working hard to combat inflation, but their efforts have painful consequences, including the threat of more than a million additional unemployed Americans in the coming year.
In today’s financial climate, a full emergency fund is essential, but it can accomplish much more than simply covering expenses in the event your income is disrupted. Here are some examples:
- A large, unexpected, and uncovered medical expense
- A major car repair (one that reaches several thousand dollars)
- Helping a friend or family member in an emergency
- Facing an unexpected legal entanglement that will require paying an attorney upfront
- A sudden and unexpected need to travel, perhaps to care for an ailing family member
- A major home repair, not covered by homeowner’s insurance or where the insurance reimbursement is seriously delayed
- An identity theft situation that causes you to lose access to your credit lines
- You receive a notice from the IRS informing you that you owe several thousand dollars in back taxes
Summary
A well-stocked emergency fund should be able to supplement your monthly income for a specific period of time — typically three to six months — should you suddenly lose your job. However, even if your career is relatively stable, you should still have an emergency fund.
No one is immune to surprise expenses. Your tire blows. Your water heater fails. Your dog devours a chocolate cake. Unexpected expenses pop up all the time, which is why everyone needs an emergency fund to fall back on.
Our emergency fund calculator can help you determine how much money you should save for future unexpected costs.