How Much Should I Have In My Emergency Fund?

Dear Kristin,

I have two questions: First, besides an emergency fund, how much money should we have in a rainy day fund to pay for future, big but necessary expenses like home maintenance and fixits, car maintenance, emergency pet care, etc? And second, how do we balance saving for retirement, saving for a rainy day fund, and saving for big stuff (e.g., vacation, car purchase)? Is there a savings formula or percentage to use as a guide?

Sincerely,

Mr. Always Worrying About Money

Dear Always Worrying,

This is such a timely question, considering there are real worries (and a likelihood) that the American economy could tip into a recession in the not-too-distant future. So let’s start with how much money you should have saved up. It’s generally advised that you keep three to six months of funds tucked away in case of an emergency—but that’s usually to replace your income in case you lose your job. I prefer six, because I’m cautious. The money that would be in an emergency fund would cover your rent or mortgage, utilities, groceries, and other necessities that you pay for, like your car loan and other bills. 

But as you point out, small emergencies happen all the time, whether it’s your car needing a new radiator or the costly replacement of a leaky roof. And you won’t want that to wipe out the emergency fund you are keeping tucked away just in case something happens to your income. How much extra you should have set aside for big, necessary expenses really depends on you and your situation. 

You should ask yourself what kind of emergencies you could reasonably anticipate given the items you own and their overall condition. If you don’t own a home or a car for example, you might not need to have as much saved as someone who does. There are other questions to ask yourself as well: Do you have insurance that will pay for broken appliances, or losses due to a fire? Is your car still under warranty to cover repairs? Have you bought these things new, or are they older and more likely to need fixing in the near future? If you have a pet, do you have pet insurance to cover health care costs? 

And if you are planning on making a big purchase in the future, such as a car, you should add maintenance and repair fees for it into your budget. For example, 1% to 4% of your home’s value should be saved for maintenance, while car repairs could set you back over $1,900 annually, depending on how often you drive. 

I understand that saving for an emergency fund, retirement, investing, as well as a vacation or a house all at the same time seems incredibly difficult, but it is possible. The best way is to create a budget, including all of these financial needs and goals. One common configuration is 50/30/20, with half of your income set aside for your needs, 30% for your wants, and 20% for your savings. But if you want to increase your savings, you can easily change the formula to fit your situation. By creating this budget, you’ll be able to set money aside to hit all of your financial goals.

Good luck!

-Kristin

If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.

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