How to Calculate and Save an Adequate Emergency Fund

What is it? How do I calculate it? Where do I store it? All great questions.

Emergency fund - a sum of money (usually 3-6 months worth of your expected, monthly expenses) that is easily accessible in the event of a costly emergency.

Step 1: Calculate the Emergency Fund

You don’t need to know calculus or even college algebra. You just need to know your average monthly expense amount. If you have no idea how much you spend in any given month, read this blog post first.

Focus on the necessities like rent, food, personal care, insurance, phone service, and pet care - you need food, shelter, and water to survive (and so does your dog!) Skip “the wants” like shopping, entertainment, travel & vacation, etc. for this calculation.

If you want a beefy emergency fund, get wild! Throw it all in - I don’t care! But if you’re currently looking over your shoulder for your disgruntled landlord, stick to the basics.

Here’s what our (married with a dog and mortgage) monthly necessities look like.

• Groceries - $600

• Alarm System - $27, fixed recurring cost

• Utilities - $250

• Personal Care - $20 (think toiletries — toothpaste, tampons, etc. that are nonnegotiable)

• Pet Expenses - $85, used high end historical monthly spend

• *Peloton Membership - $28, fixed recurring cost

• Mortgage - $2,500, fixed recurring cost (Consider averaging property taxes & insurance here, too)

• Car - $85 (Consider averaging car insurance, annual oil change costs, monthly gas expenses, etc.)

• *Subscriptions - $20, fixed recurring cost

• TOTAL: $3,615

• Low end emergency fund - x 3 months = $10,845

• High end emergency fund - x 6 months = $21,690

*Note: While fixed recurring costs, in some instances, aren’t “necessities,” I include them in my calculation since most are on auto-pay. I don’t know about you, but the last thing I’m going to do on my way to the hospital is remember to cancel my recurring payments.

Step 2: Build & Store the Emergency Fund

If you’ve calculated your fund amount, and you realize that you’ll need to slowly save this amount over time - no sweat! Add “Emergency Fund Savings” as a line item on your budget so that you don’t forget to contribute to it each month.

If your calculated emergency fund amount is currently accessible, but you don’t already have the money set aside - let’s take care of that, shall we? You have several options:

• You can put the exact dollar amount in a savings account.

  • This isn’t a bad idea, especially if you’re new to the savings game. I had a savings account in high school and college, and it did a great job of teaching me savings fundamentals. Every month I’d move over a set dollar amount to my savings account. With this method your money can be withdrawn at any time, but the average percentage annual return on your balance is pretty dang low.

  • Less risk, less room for growth.

• You can put the dollar amount in an account with interest earning potential.

  • Putting your emergency fund into some sort of money market account or high yield savings account is could be a better option for those that are really risk averse but want to earn a lil somethin’ somethin’ on their saved cash. Because the funds aren’t invested in the market, risk is still low because there’s no loss potential. Additionally, the APY (annual percentage yield) is higher for these types of accounts than traditional savings accounts. However, you will be taxed on what you earn in these accounts.

  • Keep in mind, sometimes accounts with higher APY come with higher minimum balances and potential fees for withdrawals that cause your balance to fall below that amount. Some also come with a limited number of allowed withdrawals or transactions each month. That could be viewed as a pro for tempted spenders, but there typically aren’t transaction limits on a traditional savings accounts.

• You can invest the dollar amount in the market

  • If you’re a more advanced saver and investor, and you’re confident that you can easily liquidate a portion of your market-invested funds in a time of need, you may not need a separate account for your emergency fund, and that’s totally fine. You have to decide what’s best for you!

There are clearly several ways to tackle how to store this money, but save what you are able, how you are able NOW so that you don’t find yourself in a sticky situation later.

Please note I’m not offering specific financial recommendations. Everyone’s financial situation is completely different, and there are many different paths you can take here. I just wanted to highlight some well-known alternatives to traditional savings accounts that are historically proven to have higher earning potential. Best of luck with your research - I hope this was a good starting point!