How big should an emergency fund be? Start with your bare-bones month
"Three to six months of expenses" is the advice everyone repeats. It's a decent range, but it skips the most useful step: figuring out what one month actually costs when things go wrong.
Your bare-bones month is not your normal month
If you lose your job, you'll stop spending on some things right away. So instead of using your normal monthly spending, add up only what you'd still have to pay:
- Rent or mortgage
- Utilities and phone
- Groceries (not restaurants)
- Insurance premiums
- Minimum debt payments
- Transportation to look for work
- Any medical costs you know about
Say the bare-bones total comes to $3,800 (hypothetical).
- Three months: $3,800 × 3 = $11,400
- Six months: $3,800 × 6 = $22,800
Where in that range should you be?
Lean toward the higher end if:
- Your income is irregular, commission-based, or self-employed
- You're the only earner in the household
- Your industry has long job searches
- You have a high insurance deductible you might need to cover
- You own an older home or car that may need big repairs
Lower is more reasonable for two-income households with stable jobs and solid insurance.
Don't forget your deductibles
An emergency fund isn't just for job loss. It's what pays your share when the insurance kicks in. If your home deductible is $2,500 and your health plan's out-of-pocket maximum is $6,000, your fund should cover at least those amounts in a bad year. Raising a deductible to save on premiums only makes sense if you have the cash to pay it.
Where to keep it
Somewhere boring, safe, and quick to reach: a high-yield savings account or money market account. Not in stocks, where it might be down 30% the week you need it.
If six months sounds impossible
Start with one month. Then one month of the bare-bones number. Then build from there. Even a $1,000 buffer keeps a flat tire from turning into credit card debt.
The longer guide, with a table for different household types: building an emergency fund. And how deductibles fit into the picture: how to choose a deductible.
General information only, not financial advice.