Personal Finance: How much should you set aside in emergency savings?

Experts typically recommend you have enough in your emergency fund to cover three to six months’ worth of expenses. Your emergency savings should be enough to provide breathing room in your finances to cover unexpected expenses such as a home repair or a loss of income.

For some, that might mean following the standard advice of three to six months of living expenses. Others, however, may prefer to save more or less than that amount. If you’re not sure how much to save for the unexpected, here are some scenarios to consider.

When you might want more emergency savings

Saving several months’ worth of earnings seems like a daunting task. When discussing building an emergency fund, keep in mind that we’re talking about saving up for living expenses, not replacing your entire income. So, if your monthly expenses add up to $2,500, you’ll need to save $7,500 to reach three months of emergency savings. There are times when you might want to continue saving beyond experts’ recommendations.

• You have no job stability: If you lack job stability or work in a high-risk industry, you may want to save even more.

• You are self-employed: If you work for yourself, having a large emergency fund can help you get through times of fluctuating income throughout the year.

• You are retired: Having adequate savings is key if you’re retired and much of your income comes from your investments accounts.

• You have medical issues: If you’re dealing with medical issues that may require surgery or ongoing medical care, saving beyond the norm can help bridge the gap when insurance doesn’t cover all of your medical bills.

• Uncertainty in your life: Unexpected emergencies are a part of life, but there are times you may be more vulnerable to added costs. If you drive an older, unreliable car or know your home will need some large repairs down the road, having extra savings can protect you in the long run. For single parents with kids at home and no secondary source of income, saving money can provide some peace of mind to know they are cared for regardless of what happens.

• There’s an economic crisis: Global and national events like a recession or a pandemic are out of your control. During times like these, it’s always nice to know you have money saved to cover the unexpected.

When you might want less emergency savings

Below are some times when you may buck traditional advice and carry leaner emergency savings.

• You have few expenses: Depending on your situation, you may not have many living expenses. Maybe you don’t own a home or car, or they are paid off already. If your living expenses take up only a small portion of your income, you may be fine with a smaller emergency fund.

• You have no dependents: Having children and other dependents often means higher expenses and more responsibility. You have to make sure you’re covered if something happens and you’re unable to work or provide for your family. If you have no dependents, though, you don’t need to save as much money for others’ living expenses too.

• You have credit card debt: If you have high-interest credit card debt, you’re better off building a small emergency fund and putting the rest of your money toward getting out of debt. It doesn’t make sense to continue to put money in a bank account that earns little interest when your credit card bills continue to grow from expensive interest charges.

• You want to build retirement savings instead: Even the best high-yield savings and money market accounts typically top out at 0.6% APY. While these types of accounts are great vehicles for keeping an emergency fund, your savings may not keep up with inflation over time. You might be better off setting a personal savings goal and putting anything above that amount into a retirement account. If your employer offers a 401(k) and company matching, contribution enough to take full advantage of free money for retirement savings. You’ll also lower your taxable income.

• You have other financial goals: If building a large emergency fund gets in the way of reaching other personal financial goals, you might be better served saving less for the unexpected. If you’re saving for a down payment for a house, for example, you could shift your focus to starting a sinking fund to help you reach your goal quicker. You’re still saving money with a sinking fund, but it serves a different purpose, and you shouldn’t touch it for any reason other than its intended purpose.

You ultimately decide how much emergency savings is best for you

Personal finance is personal. What might be right for one person may not be the best option for another. It’s good to listen to financial experts and understand why they advocate saving a certain amount, but ultimately the only thing that matters is whether you’re comfortable with your emergency savings. That could mean two years or two months of emergency savings, depending on your goals. As long as your savings doesn’t sabotage other financial goals, set aside whatever you need to avoid worrying about paying for the unexpected.

If you’re not covered the way you like, create a savings plan to get you there, even if it means starting slow with $10 to $100 a month. Look at your budget and monthly income to determine how much you need for living expenses and how much you can save and invest in other areas of your life like emergency savings.