An emergency fund is your safety net for when life throws you a curveball – think unexpected medical bills and car repairs. It’s a key part of managing your money because, let’s face it, surprises happen. But how much should you save? That depends on you. There’s no magic number. Things like your income, monthly bills, and whether you have dependents all factor in. The goal is to build a fund that gives you peace of mind without putting too much strain on your budget.

What is an emergency fund?

An emergency fund is designed to cover unexpected expenses. Your regular car service reveals issues you need to fork out extra cash for. Your child needs root canal treatment and Medicare doesn't cover the cost. You get a redundancy you never saw coming.

Building an emergency fund helps give you financial breathing room to prepare for emergencies , without relying on debt such as credit cards or personal loans.

The key is having easy access to this money when you need it. That’s why keeping it in a high-interest savings account is a popular option. It’s accessible and earns some interest, but isn’t exposed to the risks of the stock market. Unlike long-term investments , your emergency fund needs to be stable and available at a moment’s notice. So, while investing can be great for growing your wealth, your emergency fund should stay separate, in a low-risk account that prioritises liquidity over returns.

Factors to consider when determining the amount

When deciding how much to save in your emergency fund, several personal factors come into play. Let’s break down the key areas to consider based on your unique circumstances.

Income stability

Your income plays a big role in deciding how much to set aside. If you have a stable salary, you may not need as large an emergency fund since your income is more predictable. However, if you’re a freelancer, contractor, or work in an industry with fluctuating pay, you might want a bigger buffer to handle any gaps in income. In both cases, though, an emergency fund should prepare for worst case scenarios, such as a total loss of income.

Monthly expenses

It’s important to create a budget and know your basic monthly costs. Calculate your fixed expenses like rent or mortgage, utilities, groceries, and transport. Once you know these, you can estimate how much you’d need to cover several months if you faced unexpected costs or a loss of income. This figure will give you a clear target for your emergency fund.

Dependents

If you have children or others relying on you financially, a larger emergency fund might be a good idea. The more people depending on your income, the more money you may need to set aside to cover any emergencies that also affect them.

Debt levels

Debt can affect how much you should save. If you have significant debts, especially those with high minimum payments, consider a larger fund to ensure you can keep up with repayments even in tough times. Make sure you’re prepared for any debt emergencies that may arise. However, if your debt load is manageable or paid off, you might be able to set aside a smaller amount.

Health and insurance

Your health and insurance coverage can also impact the size of your emergency fund. If you have ongoing medical issues or limited insurance, you might need more savings to cover unexpected health costs. On the other hand, if you’re in good health and well-insured, you may not need as much of a financial cushion.

What are the general guidelines?

A commonly cited rule of thumb for an emergency fund is to save 3-6 months' worth of living expenses. This gives you a safety net to handle unexpected costs or income disruptions. Some guidelines even suggest 12 months of expenses if you have an unstable income or higher financial risks.

That said, these are just starting points. Let’s explore a few scenarios:

When more than six months might be needed

If you’re self-employed or work in a highly volatile industry, you might want to aim for more than six months of expenses. In these cases, income can fluctuate, so having a larger fund can help cover extended periods of reduced work.

When less than three months could work

If you have a highly stable, salaried job and minimal financial obligations, saving less than three months of expenses might be enough. For instance, if you’re in a dual-income household where both jobs are relatively secure, your combined financial situation may allow for a smaller emergency fund. However, keep in mind that every person’s situation is different, so it’s important to consider your own risk tolerance and comfort level. And, as a general rule, there's no such thing as too much money in an emergency fund.

These guidelines are also flexible. Your emergency fund should fit your circumstances, and what works for someone else may not be ideal for you.

Emergency fund vs other savings

Your emergency fund is different from other savings you might have for short-term goals or investments. While savings for a holiday, new car or home deposit are important, these funds have specific purposes and timelines. Your emergency fund is purely for the unexpected – medical expenses, unemployment, or urgent housing maintenance.

It’s important to keep your emergency fund separate. Mixing it with other savings or investments can make it harder to track and even risk spending it on something you hadn’t planned for. Plus, you don’t want this money tied up in investments – you need to be able to grab it quickly if things go south.

As mentioned, a popular spot for an emergency fund is an easy-to-access account like a high-interest savings account. That way, you can get to it fast when you need it, but it’s still earning a bit of interest while it sits there.

Do I need to review my emergency fund?

Yes. Your emergency savings aren’t a “set it and forget it” deal. It’s crucial to review it regularly, especially when your financial situation changes. Here are some key life changes that could prompt you to reassess your fund:

• New job or income changes : If you get a new job, lose one, or your income changes significantly, it’s time to adjust your emergency fund. A higher income might mean you can potentially save more, while a lower income might call for a larger buffer.
• New home : Moving into a new home brings different expenses. Whether it’s a mortgage, rent, or maintenance costs, your emergency fund should cover any new financial responsibilities that come with your living situation.
• Gaining dependants: Starting a family or becoming a caregiver for a dependent means additional expenses, like healthcare, childcare, and education costs. You’ll want to increase your emergency fund to cover these new responsibilities.
• Health changes: A change in your health or a family member’s health could mean higher medical bills or the need for ongoing care. A larger emergency fund could help manage unexpected healthcare costs.
• Marriage or divorce: Getting married or going through a divorce can significantly impact your financial standing. Whether you’re combining incomes or facing higher individual expenses, a review of your emergency fund can help ensure you’re prepared for the change.
• Starting a business: If you’re venturing into self-employment or starting a business , your income may become less predictable as you rely on business income. A bigger emergency fund can provide stability during the uncertain early stages of business ownership.

You might also want to adjust your emergency fund as your financial responsibilities evolve:

• Changes in expenses : If your monthly expenses increase or decrease, you’ll want to adjust your emergency fund to match your new outgoings. For example, these could include a change in bills or additional costs like school fees.
• Retirement : As you approach retirement , your emergency fund should evolve too. Without a regular pay cheque, you may need a bigger safety net to cover unexpected costs during your retirement years.
• Paying off major debts : If you’ve recently paid off a large debt, like a mortgage or personal loan, you might be able to reduce the size of your emergency fund. With fewer financial obligations, you could potentially have more flexibility.

Regularly reassessing your emergency fund ensures it’s always aligned with your current life and financial responsibilities. Major changes are the perfect time to take another look and adjust as needed.

How much is enough? It’s your call

Figuring out how much to save in your emergency fund is about what works best for you. As mentioned, it depends on your income, expenses, and what’s going on in your life. There’s no one-size-fits-all answer, but the key is to build a fund that gives you peace of mind.

Whether it’s three months’ worth or a year’s, make sure it fits your situation. Keep an eye on it as your life changes, and adjust when needed so you’re always ready for whatever comes your way.