Create an Emergency Fund

You know you should have an emergency fund in a savings account, but how much is enough? Bankrate has a simple formula for calculating your Emergency Fund goal. They suggest trying to sock away enough money to sustain you for 3 months. —MEGHANN MARCO

Emergency Fund Worksheet


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  1. Crim Law Geek says:

    Just make sure you don’t put that money in a Chase savings account or else your account might be cancelled when you need to raid the fund :-)

  2. CheritaChen says:

    Who are these people that have THREE MONTHS’ rent to sock away? I’m lucky if I can pay all of these each month, let alone stick a measly $25 into savings. I just don’t earn that much. Anyone who does probably doesn’t need this advice.

  3. Mike Panic says:

    I keep a WTF fund with ING and have never had an issue.

  4. nan says:

    3 months? That’s a good start for a single person, but I really think people should aim for 6-12 months. You never know what could happen! Particularly if you’ve started a family.

    I keep my emergency fund in an online account. I got a debit card so I do have easy access if I really need it. I hope I won’t though.

  5. krunk4ever says:

    You actually don’t want that much money in a savings account. Even high yield savings account generally have a return rate of 5%. With mutual funds and stuff, you average return rate is about 10%. Of course there is higher risk, so invest in different funds that target different areas.

    I personally have only about 1-2 months worth of spending money in my savings account purely for emergencies. The rest I put into mutual funds and stocks, and even with those, I can withdraw pretty much anytime.

  6. segfault, registered cat offender says:


    Mutual funds may return 10% on average. The idea behind keeping X months living expenses in a savings account is that even if you were without a job for X months, you wouldn’t be forced to sell your mutual funds at a loss if they were below the level at which you purchased them. Also, as you save more and more money, most people will find that, even as expenses increase over the years, the percentage of your overall wealth that is stashed in the savings account will be very small in proportion to the total amount they have invested in mutual funds and other long-term investments.

  7. segfault, registered cat offender says:

    Follow-up to what I just posted:

    I have about 10 months living expenses in a savings account, plus enough to make a down-payment on a house in the next year. The idea is that you don’t invest money that you might need in the next couple of years in a long-term investment.

  8. thrillhouse says:

    Right. Krunk, you’re blurring the lines between savings and investing. Investing is great, and you should be doing it. But you don’t want to unplug a 10% rate of return, because life happened.

    Savings is for 0-5 years. Think capital expenditure – buying a car, replacing your roof, vacation – emergency fund is also in there… Its not about a great rate of return, but there’s nothing wrong with parking some in a MMA to keep pace with inflation.

    Investing is for 5 years and up. The reason your rate of return on mutual funds is higher is because the risk is higher. You may look up one day and find that your $6k now looks something like $3k. Stocks are volatile and can vary from day to day. They are fabulous in the long term, but not great for a short-term basis.

    The whole point of the emergency fund is that it’s your security blanket. It’s there for you when you need it. Most people say that 3-6 months of expenses will allow you to weather most any storm, and I’ve found that to be true. There’s nothing wrong with having more. Like I said, part of it is security – what amount gives you that piece of mind?

    All in all, an emergency fund is one of the best things you can do for you and your family. Right up there with writing your will.

  9. konstantConsumer says:

    or, if you are 25, just stay close with your parents!

  10. humphrmi says:

    A lot of advisers and pundits recommend the same thing, somewhere between 3-6 months of “emergency” savings. And I think it’s a good idea. What most are lacking though, is how to actually do it.

    You need to prioritize, and make sure that lower priorities actually receive less funding than higher priorities. This may mean adjusting some of your other savings goals while you fund up your emergency cash. For instance, one CFP told me that I should suspend or reduce my 401(k) contributions, since I was socking all my spare income away there and had an underfunded emergency fund.

    The problem with this approach is re-starting the funding of your lower priorities (e.g. 401(k) in my case) after the higher priorities are adequately funded.

    Another problem is bringing your emergency fund up to date whenever you add a new expense. Buy a new car? Better put 3X your monthly payment into savings now, otherwise soon your 3-month emergency fund is underfunded.

    I would like to see more advise – either from posters here, or as a main article on Consumerist – on how to actually achieve these goals, not just set them.

  11. SexCpotatoes says:

    Shit, I turn 26 in May, I’m fucked and I’ll never be able to move in with my parents if something happens and I lose my house…

  12. shoegazer says:

    Actually, the FIRST thing is to “unplug” any high interest debt (credit cards, store cards, “payday loans” and so on) then try to build up a fund; while this is not realistic for a lot of people because of high living costs, you’ll have a lot less hassle budgeting when your current liabilities are 0 (and so every penny goes to the savings).

    Mortgages, auto loans etc. of course are long term debt; I’m thinking more of that two grand sitting on your (my) credit card bill with minimum payments of $100. Clear it out!

    Thankfully, I have about 4 months expenses socked away in a 5% account with ING as well – not the best rate but they provide instant access.

  13. HawkWolf says:

    shoegazer’s pretty spot-on. If you have credit card debt, it doesn’t matter how much money you save up – the savings are always really Debt – Savings = Real Savings.

    I suppose that if you have debt incurred by temporary over use of a credit card, axe the debt and hide the card and just suck it up for a while.

    I wouldn’t even suggest using something like ING for an emergency account. ING Direct takes several days to process a transfer, whereas my credit union’s transfers are, as far as I can tell, instantaneous.

  14. ReccaSquirrel says:

    I used to be of the philosophy that you should be putting all of your money towards your credit card debts and save once you have a sufficient income. That view has changed.

    $1000 on a 20% APR Credit Card is approximately $1200 if you are putting $100.00 towards it a month. It takes 12 months to replenish.

    $1000 in a savings account is $1000 and takes 10 months to replenish at $100.00. You save $200.00.

    But the real savings is in getting out of debt. An emergency fund is just that, funds for an emergency. If you are putting money away for an emergency, you are only borrowing from yourself. If you borrow from a credit card, you are only setting your debts back further. Once your savings account is at a level you are comfortable with (3 months, 6 months, or a year) then instead of adding to it, by all means hit your credit cards and get rid of them. But you really need to have something of your own to borrow from instead of a credit card.

    I had a friend who in two years paid down her credit card by $2500. She had auto trouble and it ended up costing her that $2500. Her card is at a 19% rate. She would have saved $475 if she had instead been putting the money aside instead of making extra payments on the card.

  15. wildhobo says:

    I know people on this site don’t agree but a great way to get your finances in order is to obtain a 0% credit card for some amount of time with no annual fee and 0% balance transfers. When my fiancee moved in with me and I saw the debt she had I immediately moved to this. We put about $8K dollars on it and a year later we still have $4900 but we have also have over $11K in a Discover Money Market making more than 5% interest. For people with high paying jobs (we are both engineers so not super high but high for a 22 and 23 year old).

    We were able to pay off her debt with no more finance charges and have enough for both of us to contribute the max to our Roth IRA’s this year. The next thing we are working on (besides wedding/honeymoon) is an emergency fund.

    Does anyone else use discover for their high-yield savings accounts? I can use my discover card as an ATM card if I have to, but don’t, and also get just over %5. Just curious.

  16. orielbean says:

    I think shoegazer and recca have a good grasp on the two big issues here – your high-interest debt and where to borrow money from… Seems to me that you can do both – instead of 100 to savings and 0 beyond minimum for the credit debt, do 50 and 50.

    I myself had/have no savings or emergency fund; and find myself spending on the cards more than I should. If I had that savings money sitting there, then this would be less of an issue, as I am only losing that extra 5% potential return on a mutual fund or something, vs paying a potential 15% extra interest on the card.

    I think the first real step is hashing out a realistic budget and identifying what you waste money on, like netflix or other monthly small costs that quickly add up.

    I drive in MA, and use a transponder called Fast Lane to get out of the city and to my job each day. My tolls cost me almost 130.00 a month. If I woke up a little bit earlier, I could easily find another way out of the city and avoid that huge extra cost of convenience…

  17. yalej says:

    I think 3 months is too short, 6 months is much safer. I would recommend EmigrantDirect over ING, as they pay 5.05% vs. 4.5% from ING. The other issue with reducing 401k funding is that you are potentially losing a lot of money in the future for funding your emergency fund.

  18. thrillhouse says:

    Having consumer debt does complicate things. But paying it off is the right thing to do. Good to see so many interested in doing so.

    Dave Ramsey teaches this process in baby steps and, humphrmi, if you’re interested, he talks about exactly how to implement these things in his books and on his radio show.
    step1> Starter Emergency Fund – $1000 (maybe 2k depending one insurance situations and such)
    step2> Debt Snowball – pay off all debt except for the house
    step3> Full 3-6 mo Emergency Fund (once again, you need to judge just how much based on your situation)
    step4> 15% of Income to Retirement Investments – Dave has lots of sound advice on maximizing your investing between Roth IRA, 401k, IRAs as well as how to pick your mutual funds
    step5> College Funds for the kids
    step6> Pay off the House Early
    step7> Build Wealth and Give

    So yes, humphrmi, you should cut back or suspend your 401k to get out of debt and/or build up an Emergency Fund. Once thats done, the next priority becomes retirement (step4). Go back to your employer and max it out to the match. Then max out a Roth IRA. From there, you can put more into your 401k, or open a traditional IRA. The advantage of the latter, is that you’ll have many more choices of funds in the open market.

    I highly recommend checking out his radio show and taking his Financial Peace class. He teaches all of the mechanics of these steps including budgeting, insurance, buying big bargains, relating with money, and giving. If you are interested in learning about Personal Finance, you’ll find no better teacher. Taking his class or reading his books will be well worth your time.

  19. “Who are these people that have THREE MONTHS’ rent to sock away? … Anyone who does probably doesn’t need this advice.”

    I do think this is aimed at folks who are becoming more established and monetarily stable (and/or starting families). But a SURPRISING number of people who make excellent salaries need this advice. They either dump it all into a house much bigger than they need, or put it all into retirement accounts that will penalize them if they have to withdraw anything.

    Our strategy is to keep 2 months in savings, and build up to 6 months in a money market (liquidity like savings, but a higher rate of return). Beyond that, into investments that if the tough patch lasted longer than six months, we could access if necessary. (Six months being more than enough time to liquify investment assets.) But like many other young people, we’re trying to build a buffer, start retirement savings, and pay off student loans all at once. We’ve paid down the loans to the point where we feel comfortable diverting some money from that to the buffer and retirement savings, and working on multiple goals at once. (All in very tiny increments, of course!)

    Another benefit to a mortgage, incidentally, is forebearance. If you hit a rough patch, mortgage companies will often let you pay a smaller amount or suspend payments entirely for a certain period. (Of course you’re growing the interest you’ll owe later.) Landlords aren’t so interested in letting you miss rent.

  20. mathew says:

    In case anyone missed it, the reason you put the 6 months of emergency cash in a savings account and not in mutual funds or stocks, is that you’re most likely to be out of work and in need of emergency funds when the economy is bad, which is when your mutual funds are most likely to have tanked.

    One optimization you could do is consider a higher interest savings account where you have to give 1 month or more of notice; or use a CD, and eat the penalty if you ever have to use the money.

    That said, I just use an ING Direct savings account. The extra 0.6% interest from a CD doesn’t amount to enough to be worth the extra hassle.

  21. shoegazer says:

    Hawkwolf: unfortunately in the UK, all bank to bank transfers take 3 working days, so the notional “instant access” internet account doesn’t really exist. I’ll take what I can get though.

    I agree paying down the credit cards isn’t always easy, and there are of course 0% deals which may be worth taking advantage of in the short term. I myself am carrying the aforementioned $2k on a 9 month 0% deal, to help pay down my wife’s 12%pa student debts, but I am not worried and can pay this back easily with existing savings.

    I think the magic word is “liquidity”. As mentioned by many here, stocks and term deposits are not to be considered “emergency funds”. Cash should be easily available, but not on a card account or anything that could allow you to drain it on an impulse buy.

    A quick (not easy) way to build up a fund is to “crash save” by setting a savings target, cutting back to the bare essentials to meet the target, then rewarding yourself at the end of the period. Say you want $1k savings, try to save $600 for 2 months (don’t smoke or go out or drink $6 coffees, whatever), then treat yourself to a nice mini break for $200. Again, by not having “hidden” debt it makes it easier to accomplish this.

    Glad to see this is a hot topic.

  22. HawkWolf says:


    Oh, I meant my savings account with my Credit Union is accessible to my checking account with my credit union. So if I want money from one into the other, their computer just .. I dunno, does something banking-like and bing, I have money. In other words, maybe it’s not a good idea to keep your EMERGENCY OMFG I NEED IT NOW savings somewhere totally alien to your standard checking account. Unless you have Chase. :)

    It’s probably *not* ‘instant’, but they’ve never dinged me for transferring and immediately doing a transaction based on those funds.

  23. humphrmi says:

    Thrillhouse, thanks for the great link to Dave Ramsey, I’m going to check it out.

    In my case, I have no debt except for my mortgage and one 0% car loan (I have very good credit and pay off every month). On the other hand, I have in the past socked everything into retirement and neglected my emergency fund. So I need to get back on track.

    Thanks again for the info.