How to Size Your Emergency Fund: CFP Insights

Our Promise to You

Our editorial team at GOBankingRates is dedicated to delivering trustworthy insights. We use a meticulous approach to evaluate financial products, ensuring advertiser independence. For a closer look at our processes, explore our editorial policies and review methodology.

20 Years
Helping You Live Richer

Trusted by
Millions of Readers

How do you determine the size of your emergency fund? Just like Goldilocks, you need your financial safety net to be just right. This balance is crucial because an emergency fund that’s too small leaves you vulnerable, while one that’s excessively large might result in missed growth opportunities.

Does this sound tricky? Finding the right balance isn’t easy as emergencies are inherently unpredictable.

Financial Planner Andrew Latham explains a straightforward framework to evaluate your emergency fund’s adequacy. Moreover, he provides insights on how to get it right.

Establish a Baseline For Your Emergency Fund

According to Latham, there isn’t a universal amount everyone should aim for in their emergency funds. It all hinges on your personal circumstances, such as expenses and job stability. A basic guideline is to save enough to cover three to six months of essential living costs.

To identify your target, begin by listing essential monthly expenses, like housing, utilities, groceries, insurance, and transportation. This sum is your foundational “survival number.” Multiply this by:

• Three months: Suitable for individuals with stable jobs and no dependents.
• Six months: Ideal for those with irregular income or dependents.
• Nine to 12 months: Necessary if you’re the primary breadwinner or face consistent challenges.

Maximize Your Fund’s Potential

Once you decide how much to save, it’s important to choose the right place to store it. Leaving everything in a checking account isn’t wise. Instead, keep one month of expenses on hand for quick access, while putting the rest into a high-yield savings account to grow your funds.

Latham suggests another option: a Roth IRA. You can withdraw contributions tax-free if needed, and investing in short-term U.S. Treasury bond ETFs within your Roth IRA could provide liquidity and potential growth.

Steps Toward Long-Term Financial Safety

Start your emergency fund with automatic savings transfers, even modest amounts, to build a habit. Once your emergency savings are secure, you can focus on other goals like retirement, debt repayment, or a vacation. Use the 50/30/20 rule to divide your income for effective budgeting.

But remember, the right balance ensures you have enough to cover emergencies without excess cash stagnating. Let your funds be ready when necessary and grow when not.

This article is part of our Top 100 Money Experts series. Have a question? Share it here for a chance to win $500.

Want more personal finance tips and strategies? Click Here.