How much should I save in my emergency fund?

As you begin your financial planning journey, one of the first things to tackle is the establishment of an emergency fund. An emergency fund can keep you from going into debt to handle life’s unexpected expenses: medical bills, job loss, car repairs, etc. There’s not a hard and fast rule as to how much should be in your emergency fund, but there are a few things to consider.

First, you’ll want to review your monthly spending, and identify fixed expenses. These will include housing costs, utilities, groceries, transportation, insurance premiums and any debt payments. While you’re working on this, it’s a good idea to review your discretionary expenses – dining out, shopping, travel, and any other miscellaneous expenses. This exercise will help you determine where you could pull back on spending in an emergency.

Next, you’ll want to figure out how many months of expenses that you want to keep in your emergency fund. More instability in your income should translate into more months of expenses in an emergency fund. Someone who does mostly freelance work will have a much bigger emergency fund than a couple where both partners are salaried employees. Most people target between 3 and 6 months of expenses, but the aforementioned freelance worker might want to keep as much as 12 months worth of expenses in their emergency fund.

Once you’ve identified your target amount for your emergency fund, it’s time to start building it. Establish a new savings account that’s specifically for emergencies, and then start funding it. Set up an automatic transfer from your checking account that takes a certain amount towards your goal from each paycheck. Once you are used to the idea of that amount no longer available to spend, consider increasing the amount that you are transferring from each paycheck. Once you’ve reached your target amount, you’ve now begun a habit of saving, which can now be redirected to your next financial goal!