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How big should your emergency fund be?

Name ____________________ Date __________

Key ideas

  1. Size it from essentials, not income. Add rent, utilities, groceries, insurance, transport and minimum debt payments. In the example, that comes to $2,440 a month.
  2. Three to six months is the usual range. Three months fits a stable job with two earners. Six or more fits a single income or uneven pay.
  3. A $1,000 starter fund comes first. It covers common surprises like a car repair. Then pay down high-interest debt and grow the fund toward its full target.

Vocabulary

Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
Insurance deductible
The amount you pay yourself on a covered loss or medical bill before your insurance starts to pay.
Sinking fund
Money you set aside a little at a time for a known future cost, like car insurance, holidays or a new laptop.
High-yield savings account
A savings account that pays a much higher interest rate than a typical bank savings account, often offered by online banks.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.

Work it out

Maya rents alone, has a stable salaried job and $1,200 saved. She wants three months of essential bills set aside.

  1. Rent
  2. Other essentials
  3. Monthly essentials
  4. Month 2
  5. Month 3
  6. Three-month target
  7. Already saved
  8. Still to save

Check yourself

  1. Which cost belongs in your emergency fund target?

    • A. Your streaming subscriptions
    • B. Your minimum credit card payment
    • C. Your vacation budget
    • D. Your restaurant spending

  2. Your essentials are $2,000 a month and you want four months of cover. What is the target?

    • A. $6,000
    • B. $8,000
    • C. $10,000
    • D. $24,000

  3. Where is the best place to keep an emergency fund?

    • A. An index fund
    • B. Your everyday checking account
    • C. An insured high-yield savings account
    • D. Cash at home

Your turn

List your monthly essentials and multiply by three. Then open a savings account at a separate bank and schedule an automatic transfer for the day after your next payday, even if it is only $25.

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Answer key

How big should your emergency fund be?

Work it out

  1. Rent$1,250
  2. Other essentials$1,190
  3. Monthly essentials= $2,440
  4. Month 2$2,440
  5. Month 3$2,440
  6. Three-month target= $7,320
  7. Already saved− $1,200
  8. Still to save= $6,120
  1. Maya counts only bills she would keep paying: rent $1,250, plus $1,190 for utilities, groceries, insurance, transport, phone and debt minimums. That is $2,440 a month.
  2. Three months is $2,440 + $2,440 + $2,440 = $7,320. She has $1,200, so she needs $7,320 − $1,200 = $6,120 more.
  3. To finish in a year she saves $6,120 ÷ 12 = $510 a month, by automatic transfer the day after payday.

Check yourself

  1. B. Your minimum credit card payment You must keep making minimum payments even if your income stops. Subscriptions, vacations and dining out can be cut.
  2. B. $8,000 $2,000 × 4 = $8,000. Size the fund from essentials times months of cover.
  3. C. An insured high-yield savings account An insured savings account is safe, earns interest and is easy to reach within a day or two, while staying separate from spending money.