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What's the right emergency savings amount? 

Read time: 6 to 7 minutes

How much money should you put aside for an emergency? Answering these questions will help you decide:

What do you want to be prepared to handle?

Financial shocks can be big or small, short- or long-term. Vanguard splits emergency savings into two types—preparing for likely spending shocks and protecting against possible income shocks.

Spending shocks 

Maybe your car needs new brakes. Maybe your refrigerator stopped working. Unexpected health care costs, car repairs, or home repairs can hit without warning. The key is making sure you have money on hand to cover expenses like these without going into debt.
How much would you need?
Consider saving at least $2,000 or enough money to cover 2 to 4 weeks of expenses. Think about your insurance coverage, deductibles, and everyday expenses when determining your personal target. For example, the cost of replacing a tire on a fancy sports car is much higher than the cost of replacing a tire on a modest 4-door sedan.
Where should you keep these savings?
These are spending events that come rapidly and can quickly impact your budget. So it’s ideal to have these savings in transactional accounts (like checking or saving accounts, or a money market fund) that allow for quick access with minimal to no fees or tax impacts.

Income shocks 

While less likely to occur than spending shocks, losing a job can put tremendous strain on your finances. Even if you're eligible for unemployment benefits, it may not be enough to cover the essentials like:

  • Housing
  • Food
  • Health care (including insurance)
  • Utilities
  • Transportation
  • Personal expenses
  • Debt
  • Childcare
How much would you need?
A good starting place is to save at least 3 to 6 months of living expenses in case you suddenly lose your job.
Where should you keep these savings?
For many, the risk of an unexpected job loss can be low. So saving for income shocks can be balanced against other priorities. This money should be accessible but not necessarily free from market risks.

If you're particularly exposed to income shocks, you may choose to have cash set aside. For many though, it can be useful to rely on money you can access that's invested for other long-term goals. These savings could be kept in a taxable brokerage account or a Roth IRA.* Health savings accounts (HSAs) can also be considered. Keep in mind that HSAs are limited to qualified medical expenses and have contribution limits as well.**
*Withdrawals from a Roth IRA are tax-free if you’re over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.

**You can only use your HSA for medical costs that are covered. Otherwise, you may have to pay income tax on the money you take out. And if you're under age 65, you may also face a 20% federal penalty tax.
EXAMPLE:  HOW TO SET TARGETS FOR SAVINGS

Bob reviews his expenses. He's spending $4,000 a month. He uses this amount to see how much to save.

How he saves for spending shocks:

  1. Sets a target of 2 weeks of expenses (half a month).
  2. Does some quick math. One half of $4,000 = $2,000.
  3. Has a target of $2,000.
  4. Saves this money in a checking account.

How he saves for income shocks:

  1. Sets a target of 5 months of expenses.
  2. Does some quick math again. $4,000 x 5 = $20,000.
  3. Has a target of $20,000.
  4. Saves this money in a brokerage account and invests it.*

*Whenever you invest, there's a chance you could lose the money. Past performance does not guarantee future results. Investing may mean you have more or less than targeted when a need may arise.

Which factors could increase need for savings? 

Consider bumping up your emergency savings if:

  • Your income isn't steady.

  • You have dependents.

  • You work in an industry where layoffs are common.

  • Most of your money is in more volatile stock and bond investments.

  • You are the sole or primary income earner in your household.

  • The economy is in a recession (when unemployment rates are higher, and unemployment duration is often longer).

  • You have higher insurance deductibles or lower coverage limits.

  • Most of your spending is on essential items or services.

 

What if I can't afford to save much at all? 

Maybe you have examined your budget and are concerned about your ability to save enough to reach your targets. Just like some exercise is better than none, setting aside some savings is better than none. So save whatever you can afford.

Learn more about preparing for a financial emergency

Stash away smaller amounts on a regular basis, like every week or every paycheck. If possible, you can set this up to take place automatically, so you don't have to think about it. If you keep it up, over time you'll eventually meet your goal.

The important thing is to start saving something. For instance, let's say you set aside $25 each week in emergency savings. At the end of 2 years, you could have $2,600 saved. Increase that amount to $50 each week and your savings could grow to $5,200. Make it $75 each week and you'll have saved an even larger amount—$7,800!

Everyone's situation is different, so you may want to speak with a financial advisor before finalizing your plans.