Emergency fund: Why you need one | Vanguard (2024)

FAQs

Emergency fund: Why you need one | Vanguard? ›

Your emergency fund will help protect you from 2 different types of financial emergencies: spending shocks and income shocks. Spending shocks—like a broken windshield or a root canal—are unplanned, unwanted expenses.

An emergency fund is a cash reserve that's specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.

While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.

Experts recommend saving enough to cover thhree to six months of essential expenses -- but even one month's worth can help in an emergency. Your ideal emergency fund amount depends on several factors, including your income, household size and debt load.

​This amount can over a lot of common emergencies or unexpected expenses: a speeding ticket, an urgent care clinic visit, many car repairs, unexpected school-or extracurricular-related expenses, an appliance repair, and so on. Once you save $500, try saving $1,000.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

Here are three questions you could ask yourself to help determine whether it's time to use your emergency savings: Is this an unexpected expense? Is it necessary? Is it urgent?

The long answer: The right amount for you depends on your financial circ*mstances, but a good rule of thumb is to have enough to cover three to six months' worth of living expenses. (You might need more if you freelance or work seasonally, for example, or if your job would be hard to replace.)

Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation.

Financial experts advise that you should have at least 3 to 6 months of living expenses in your safety net. Where you fall on that spectrum depends on a variety of factors such as your job stability, family size, how many earners are in your household, and how diversified your income is.

What is the ideal emergency fund amount? ›

People in stable jobs are recommended to put away 3-6 months' salary into their emergency fund, whereas people with lower job security are recommended to save 6-12 months' salary. A stable income ensures a consistent and bigger emergency fund.

Your emergency fund could be too big if it exceeds three to six months' worth of expenses. That said, everyone has a different financial picture. Some people keep up to a year's worth of savings in an emergency fund, while others might find that sticking to closer to three months frees them up to pursue other goals.

Final answer: An emergency fund is typically tapped into for unexpected and necessary expenses. Among the given options, paying a $500 deductible after a car accident is a good reason to dip into this fund. Replenish your emergency fund as quickly as possible after using it.

Your emergency fund will help protect you from 2 different types of financial emergencies: spending shocks and income shocks. Spending shocks—like a broken windshield or a root canal—are unplanned, unwanted expenses.

Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.

The purpose of an emergency fund is to set money aside for unexpected financial emergencies and to provide a sense of financial security.

Most of us have seen the guideline: You should have three to six months of living expenses saved up in an emergency fund. For the average American household, that's $15,000 to $30,000¹ stashed in an easily accessible account.