Are you saving for retirement and wondering how much emergency money you should have saved up? Whether you are just starting your FIRE journey or well on your way, emergency funds can be a little tricky to understand. Putting all the money you have in a bank account instead of investing can be very difficult for those just starting. For those further along on their journey, watching a significant chunk of change make very little interest can hurt to see!
What is an emergency fund?
I like Vanguard’s description. They say
An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.
Here are some of the top emergencies people face:
- Job loss.
- Medical or dental emergency.
- Unexpected home repairs.
- Car troubles.
- Unplanned travel expenses.
Essentially you shouldn’t invest 100% of the money you have. It would be best if you kept some in a very liquid form like a checking account or a high yield savings account in case of emergencies.
But this begs the question, exactly how much emergency fund money should I have?
How much is enough?
It would be best to have three to six months of expenses saved in your emergency fund.
I know, that’s a heck of a lot. I remember the first time someone suggested that I thought they were out of their mind! I always have six months’ worth of expenses in a savings account at this point in my journey, but it wasn’t always that way!
Let’s talk about how much emergency fund money I had at various points in my journey and where I keep that money!
How much emergency fund money at various stages
There are some really important financial freedom steps to take before starting your emergency fund. Check out this list of things to do before putting money into an emergency fund.
Stage 1 – Just starting out
For most of my life, I had a whopping $0 in my emergency fund. Which is a fancy way of saying I didn’t have one! I was making minimum wage and living paycheck to paycheck like so many people. All of my money went into my checking account, and I spent it on necessities.
Stage 2 – My first good job
I caught a lucky break when I was 24 and landed a real job with an actual salary and health insurance 🎉. I was making great money, but there was no way I could amass six months of living expenses in cash. Instead, I saved up $1,000 and put it in my savings account instead of my checking. That was a big victory!
Stage 3 – A string of good fortune
Over the years, I caught a few big breaks. I moved up quickly in my field and ended up landing a great job at a great company. The only thing stopping me from having a six-month emergency fund was that I was living in San Francisco, and six months of rent is like a million dollars.
Still, I was able to bump my cash savings up to $7,000, which felt great. I put that in my savings account and figured it was enough for a rainy day!
Stage 4 – Getting serious about FIRE
I ended up moving out of San Francisco to a city with a lower cost of living. I got serious about investing and saving and started charting my FIRE journey. I became very good at tracking my budget and knowing exactly how much I spent each month. I was finally able to confidently set aside six months of expenses in an emergency fund.
Where should you keep your emergency fund?
The last topic I want to cover is where you should keep your emergency fund money. You don’t want it invested in the stock market because you want it to be easier to access and less likely to lose value right when you need it most.
Most people keep their emergency funds in traditional savings accounts through their bank. There is nothing wrong with this, but there are better options.
My recommendation is that you keep your emergency fund in a high-yield savings account. They have all the benefits of a traditional savings account, but they earn more interest! I use Betterment for mine, but this article has a great list of the most popular ones and their current rate.
One note is that their APY rates change from time to time, so don’t obsess over getting the absolute best rate. Find one that you like that gives 0.50% APY or more!