How much should I have in an emergency fund?
Typically, we need enough funds in an emergency savings fund to cover our monthly living expenses for three to six months. If you’re not sure how much you need, this emergency fund calculator can help you set an emergency savings goal.
How to calculate the amount of the emergency fund
Since the goal is to have enough storage to cover three to six months of expenses, it all starts with determining how much it takes to cover a month of bills. One of the easiest ways to do this is to comb through your checking account to identify essential expenses. List these expenses. For example, your list might look like this:
- Housing $ 1,400
- Transportation costs $ 400
- Utilities $ 250
- Food $ 800
- Gasoline $ 200
- Credit card $ 75
- Insurance $ 125
- Personal loan $ 200
- Average medical expenses (including deductible) $ 150
Add these amounts together. In this case, the total is $ 3,600. This means that an adequate emergency savings account would contain between $ 10,800 and $ 21,600. It might seem like a daunting amount of money to set aside for monthly expenses, but you don’t have to do it all at once.
Where is the best place to keep an emergency fund?
Emergency savings funds can be kept in a regular savings account, but the interest rate earned on that account is likely not high enough to keep up with inflation. Instead, consider an account that offers a higher interest rate, while still allowing access to funds if an unforeseen expense arises.
High yield savings account
A high yield savings account is like the best savings accounts, with one big exception: it pays a higher interest rate. Typically, this rate is at least 10 times the National Annual Percentage Return (APY). It provides access to funds in the event of a problem, such as unscheduled household repairs, while retaining the benefit of a higher compound rate. You will likely find that an online-only bank offers the highest current rate due to its low overhead.