How Much Money Do I Need in My Emergency Fund?

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Building and maintaining an emergency fund is a staple of basic financial building blocks. But how much money do you need in your emergency fund?

Depending on which personal finance expert you ask, you’ll get a different answer. In this article, I’ll explain money expert Clark Howard’s opinion on the amount of money you should put into your emergency fund.

How Much Money Do I Need in My Emergency Fund?

If you want to get an A+ on your financial report card from Clark, you need six months of expenses in your emergency fund.

But if you stop reading there, you’ll miss important nuances. For example, if you have three months of expenses in your emergency fund, Clark would still give you a smile and a congratulatory pat on the back.

There are some financial personalities that are, shall we say, militant about their rules and advice when it comes to money. Whereas if you want Clark to put a number on the amount of money that you need in your emergency fund, it’s a half-step easier than pulling teeth.

Your first priority as a saver is to start somewhere, Clark says. If you don’t have any savings, take $10 from your next paycheck and put it into a savings account. Don’t feel obligated to hit a certain amount of money by a certain time. Just get in the habit of contributing to your savings account. Then slowly increase how much you’re putting into your savings account over time.

Focusing too much on the “ideal” amount of money in an emergency fund can discourage or prevent you from saving. In other words, don’t let perfect be the enemy of good.

“It’s all about building habits, whether it’s with your health or your wallet, that you do it one step at a time,” Clark says. “And then, when you’re in the habit, you really can move toward the goals that are really going to change your financial future.”

How Do You Calculate Your Monthly Expenses?

You’ll notice that Clark and others often talk about emergency funds in terms of monthly expenses. But how does one determine a good number for that?

If your household is anything like mine, the amount of money you spend every month can vary wildly. That’s true even if you have a baseline budget. You can encounter medical expenses, plan a vacation, celebrate a birthday or holiday, run into car problems and any number of other variables.

Fortunately, determining your monthly expenses is more math than art. Look at your financial statements for the last six or 12 months. Then, take into account any cash you’ve withdrawn and spent in addition to all your bills and other outgoing payments. If you’re married and your household includes children, add in those expenses as well.

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The average of all of those expenses should be the number you use.

Quick Example: Calculating Your Monthly Expenses

Let’s say that you and your spouse spent $120,000 last year on everything in your life. Divide that by 12 months and you’ve got an average of $10,000 a month.

Do you have $25,000 in your emergency fund (which Clark also calls a rainy day or “oops” fund)? That’s 2.5 months of expenses.

Now let’s say that you recently moved from a one-bedroom apartment where rent was $1,500 a month to three-bedroom apartment that’s $2,500 a month. You can probably add $1,000 to your average monthly expenses, raising them from $10,000 to $11,000.

So if you wanted six months of expenses in your emergency fund, you’d need $11,000 times six, or $66,000.

Can an Emergency Fund Be Too Big?

Clark distills his financial philosophy down to a simple sentence: Live on less money than you make. Saving, and creating an emergency fund, isn’t much more complicated than that.

But is there a point at which you’ve saved too much money in your emergency fund?

Yes. And ironically, it has become more tempting to overload your emergency fund in 2023 than it was just two years ago.

Then, the best high-yield online savings accounts were paying in the neighborhood of 0.5% annual interest. That’s just $250 of interest in a year on $50,000 in savings. Now you can find several savings accounts that pay 5% interest. There have even been opportunities to get a one-year CD for 5.5% or more.

At the same time, the S&P 500 remains down 8.9% from Dec. 31, 2021, until Oct. 12, 2023. Certain individual stocks have dropped exponentially more than 8.9% during that time. And we’ve experienced major volatility.

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However, you’re sacrificing long-term wealth by being afraid to invest and keeping everything liquid in a savings account, CD, short-term bond index fund or money market fund.

In the long term, the S&P 500 has averaged a return of more than 11% per year. And the gains are always concentrated on a small number of days that are almost always unpredictable.

“Waiting until the market is more stable” often just means missing out on a huge percentage of the long-term gains.

The more money you have in an emergency fund over and beyond six months of expenses, the greater your opportunity cost with investing. (There are a few exceptions, such as when you’re saving for a down payment to buy a house.)

Final Thoughts

How much money should you keep in your emergency fund? Between three and six months of your expenses, Clark says.

However, he doesn’t think you should be especially hard on yourself if you’re not there yet. The most important thing is to start saving and to make saving a habit.

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