Last year, SecureSave reported that 63% of Americans did not have enough money in a savings account to cover an unplanned $500 emergency expense. So if you're sitting on a $20,000 emergency fund, you're clearly in a much more solid place.
But believe it or not, just because you have $20,000 to your name doesn't mean your emergency fund is automatically complete. Perhaps you still have work to do on the savings front.
It's a matter of your personal expenses
There are two purposes to having an emergency fund -- to give you money to access when unplanned bills pop up, and to get you through a period of unemployment. It's for the latter reason especially that workers are generally advised to save enough in an emergency fund to cover three to six months of essential expenses. The logic is that it might take that long to find a job after losing one, so having that level of savings could make it possible to avoid credit card debt while unemployed.
Now whether you opt to aim for a three-month emergency fund or a six-month fund (or more) will depend on your personal circ*mstances and how much financial peace of mind you require. But three months' worth of bills in savings should really be your minimum goal.
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With that in mind, whether you're all set with a $20,000 emergency fund will really depend on what your monthly expenses look like. If your essential bills come to $6,667 a month or less, then you may be well-protected with $20,000 in the bank.
But if you're a higher earner who spends $8,000 a month on essential expenses, then your minimum emergency fund target should really be $24,000. And if your monthly spending comes to $10,000, then you should really be aiming for $30,000 in your emergency fund.
RELATED: Emergency Fund Calculator
Higher earners might want more
If you're a higher earner, you may want to amass enough savings to cover six months' worth of expenses instead of just three. Why so? Upper-level jobs that are lost can sometimes be harder to replace than lower- or mid-level jobs, since there tend to be fewer of them.
Imagine you're an IT professional on a team of 20 earning $80,000 a year. If you were to get laid off, chances are, you'd find a comparable job with a similar salary in a few months' time. But if you're the VP of Technology at your company and you earn $240,000 a year, there may not be as many openings for that same role at different firms. So for that reason, when you're a higher-paid professional in more of a specialty role, it often pays to have extra savings, just in case.
Focus on your expenses, not just a single number
For some people, a $1 million nest egg could make for a very comfortable retirement. For others, a sum of that nature might fall short.
Similarly, for many working Americans, a $20,000 emergency fund will indeed be more than adequate. But if you're a higher earner with large bills, you may be an exception to that rule.
So rather than focus on a single number in the context of planning out your emergency fund, instead, run the numbers to see what you actually spend on a monthly basis. And then figure out how many months of income it pays for you to replace.
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FAQs
While $20,000 may be more than what many Americans have in savings, it's not guaranteed to be an adequate emergency fund for you. Your emergency fund should be set up to cover at least three full months of essential bills. If your monthly expenses are high, you may need to save more than $20,000.
What is considered a full emergency fund? ›
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.
Do I have the proper amount in an emergency fund? ›
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. The number of earning members in the family also matters.
How much does the average person have in emergency fund a month? ›
To prepare for income shocks, many experts suggest keeping enough money in your emergency fund to cover 3 to 6 months' worth of living expenses. So if you spend $5,000 per month, your first emergency fund savings milestone should be $2,500 to cover spending shocks.
What to do after an emergency fund is full? ›
Next Steps After Achieving Your Emergency Fund Goal
Use the momentum you've built to aggressively pay off high-interest debts. Boost retirement savings: Look for opportunities to increase retirement contributions. If your employer offers a 401(k) match, contribute at least enough to capture the full match.
Is $20000 a good emergency fund? ›
Your emergency fund should be set up to cover at least three full months of essential bills. If your monthly expenses are high, you may need to save more than $20,000.
What is the golden rule of emergency fund? ›
How much should you have in your emergency fund? The golden rule is to squirrel away at least three to six months of your basic living expenses for an emergency. That way, should a major life-shifting event set you back financially, such as a job loss, you'll have enough to cover your bills.
Is $10,000 a good emergency fund? ›
When asked how much money they'd need to save for a financial emergency to avoid additional stress, 40% would feel comfortable having a modest amount — below $2,500 — set aside. 21% say they'd need at least $10,000 saved to feel secure.
Why shouldn't you keep your emergency fund money in your checking account? ›
“By leaving funds in your normal checking account, they are more likely to be spent like normal savings and not be saved for emergencies,” said Nicole T.
Do I have too much in my 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.
For the average American household, that's $15,000 to $30,0001 stashed in an easily accessible account. These funds will help you deal with an unexpected job loss, major medical costs, or other emergencies.
How many people have a $1,000 emergency fund? ›
Most would not turn to cash savings because they don't have it, the personal finance website found. Fewer than half of Americans, 44%, say they can afford to pay a $1,000 emergency expense from their savings, according to Bankrate's survey of more than 1,000 respondents conducted in December.
What is the only place you should keep your emergency fund money? ›
Bank or credit union account — If you have an account with a bank or credit union—generally considered one of the safest places to put your money—it might make sense to have a dedicated account where you can keep and maintain these funds.
What does Dave Ramsey say about emergency funds? ›
How Much You Should Have in Your Emergency Savings. Here's a Dave Ramsey principle we agree with: If you make less than $20,000 per year, aim to have at least $500 in emergency savings. If you make more than $20,000, then aim for at least $1,000.
What should an emergency fund not be used for? ›
Try to avoid using your savings on nonessential items and services, such as a vacation or entertainment expenses. Here's a good barometer: Consider whether you actually need something to survive. If not, think twice before using emergency fund money for the purchase.
How much cash should you keep in an emergency fund? ›
Generally, your emergency fund should have somewhere between 3 and 6 months of living expenses. 1 That doesn't mean 3 to 6 months of your salary, but how much it would cost you to get by for that length of time.
Is $10,000 good for an emergency fund? ›
When asked how much money they'd need to save for a financial emergency to avoid additional stress, 40% would feel comfortable having a modest amount — below $2,500 — set aside. 21% say they'd need at least $10,000 saved to feel secure.
Is $5,000 enough for emergency fund? ›
For many people, $5,000 would be inadequate to cover several months' expenses in the event of job loss or an expensive emergency. If that is the case for you, $5,000 would not be considered an overfunded account.
