Saving Up for Your Emergency Fund? You Might Need More Than You Think

A recent SecureSave survey found that 67% of Americans don't have enough emergency savings to cover an unplanned $400 expense. But even if you have a lot more money than that in your emergency fund, you may not have enough.

Don't just land on a random number

Some people will save a fair amount of money for emergencies, like $5,000, and assume they're all set. A $5,000 savings account balance is certainly respectable. And you should feel proud if you've saved that much. But that doesn't necessarily mean your emergency fund is complete.

Your emergency fund should be a function of your specific expenses. And the general convention is to save enough to cover at least three full months of essential bills. 

So if you only spend $1,500 a month on essential expenses, then yes, a $5,000 emergency fund puts you in good shape. But if your essential bills come to $2,700 a month, then a $5,000 emergency fund may not cut it.

Why three months' worth of essential bills? While your emergency fund is designed to cover things like sudden home or car repairs, it should also be set up to get you through a period of unemployment. And it's fair to assume that if you were to lose your job, it might take three months to replace it with a new one. That's where that guidance comes from. 

Also, if you have enough money in the bank to pay for three months of essential expenses, you should have enough to cover other costs that arise unexpectedly, like medical bills. So all told, that three-month guidance is worth following. And if you can do even better so you're saving closer to six months of expenses or more, you'll have that much more financial protection.

Expenses your emergency fund should account for

As mentioned above, your emergency fund should be specific to you. So what you'll want to do is comb through your bank and credit card statements to identify your essential bills, and then list them along with their respective costs. 

In doing so, though, don't forget about bills you don't pay every month. It may be that you own a home and owe property taxes on it once a quarter. Your emergency fund should account for that expense.

What's more, while the usual guidance is to have your emergency fund cover three months of essential expenses, you may want to pad yours so there's room for some modest non-essential spending. Having access to streaming content, for example, could be good for your mental health while you're out of work and stuck at home a lot. So that's a bill you may want to keep paying even in the event of a lost paycheck. 

Similarly, let's say you have kids and one plays on a baseball team. Would you really want to have to pull them out for three months because you can't pay your monthly club dues? Probably not. So in that case, you'd want your emergency fund to include a little extra money for that expense, even if it's technically not a necessity.

How to calculate your emergency fund

Once you've identified the expenses your emergency fund should cover, it's a matter of a little addition and multiplication. So, let's say these are your total monthly expenses:

• Rent: $950
• Utilities: $100
• Cellphone: $100
• Streaming content: $50
• Groceries: $400
• Medication: $50
• Car payment: $450
• Car insurance: $150
• Gas: $100
• Gym membership: $50
• Social outings: $200

The total of all of these expenses is $2,600. You may decide that in the event of a layoff, you'd be okay with canceling your gym membership and skipping out on social plans for a limited period, but you need your streaming content to not go out of your mind with boredom at home. So in that case, you could subtract $250 from your total, bringing that number down to $2,350.

But wait! What if by losing your job, you also lose your health insurance and have to pay for coverage of your own? That might add $300 a month to your expenses. So suddenly, your essential monthly spending is back up to $2,650. And if you want enough of an emergency fund to pay for three months of essential spending, then you'll need a total of $7,950 in the bank. 

This also assumes you're comfortable only saving enough to cover three months of bills. You may be aiming for six months' worth. But it gives you a starting point.

Of course, your expenses might look different than the ones above. This is only an example. 

The point, however, is that your emergency savings needs may be greater than you think. So if your goal is to build a fully loaded emergency fund, make sure you're working with the right target.