Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
An emergency savings fund is a key tool for navigating life’s unexpected events. Medical expenses, job loss or a costly accident can happen when you least expect it.
“You never know what kind of curveballs life is going to throw your way,” said Scott Snider, a Mellen Money Management certified financial planner. “You lose your job, the roof of your house requires replacement, you need new tires on your car. It's a lot easier to prepare for situations like these when you are in a sound financial position than to react after the fact.” Snider said he emphasizes to his clients the importance of saving for a rainy day.
There are several ways to go about creating an emergency fund. Among the most well-known techniques is the 50/20/30 rule, under which people divide each paycheck into three categories: 50% for essential needs, 20% for savings and debts and 30% for discretionary spending.
Alternatively, financial planner David Ramsey recommends that people keep three to six months of expenses in an emergency fund. Personal finance guru Suze Orman recommends that you keep eight months of expenses emergency fund.
So how much should you save? We are taking a data-driven deep dive to answer this question, based on the Bureau of Labor Statistics (BLS) tabulation of the median expenditures for the average American.
How much should I have in savings?
The amount you need to save depends on your income and your age. Needs and costs vary at different stages of life, and other factors — whether you are single or married, whether you have dependents, if you rent or have a mortgage, among others — also have a big impact on the amount you should have salted away.
According to Ken Tumin, founder and editor of Deposit Accounts, a LendingTree subsidiary, life changes are as important as age in determining how big your emergency fund should be.
“If your job isn’t stable, you require a larger emergency fund,” said Tumin. “The more children you have, the larger your emergency fund should be so that you can cover bills if they have any unexpected problems.” If you own a house, he added, that is also a reason to increase the size of an emergency fund to cover unexpected repairs.
In the table below, we have taken the median monthly expenditures of the average American — from the BLS 2017 Consumer Expenditure Survey — at different stages of life, and then multiply by three to six to get our emergency fund numbers.
|How much should I have in savings?|
|Age||Median monthly expenditures||3-6 month emergency fund amount|
|25 years old||$3,640||$10,920 to $21,840|
|35 years old||$4,500||$13,500 to $27,000|
|45 years old||$4,580||$13,740 to $27,480|
|55 years old||$4,060||$12,180 to $24,360|
How much should I have in savings in my 20s?
Households led by someone between the ages of 25 and 34 earn a median of $69,062 a year, according to the BLS 2017 Consumer Expenditure Survey.
For the average person in that age bracket, major life events might include getting married, planning a family, or buying a home. Snider said that an emergency savings account is essential regardless of age.
“Younger people usually have fewer resources at their disposal. Therefore, a target of three months’ worth of living expenses is more realistic,” he said, adding that setting realistic expectations is especially important to make sure younger savers don't get discouraged by setting too high a target.
For the average American in this age group, BLS monthly median spending include:
- $1,661 on housing
- $760 on transportation
- $616 on food
- $188 on health insurance
- $270 on utilities
- $145 on credit card debt
That’s a monthly average on essential spending of $3,640. By using the three to six months emergency fund rule, you should have $10,920 to $21,840 in your emergency fund.
How much should I have saved in my 30s?
Households led by a person between the ages of 35 and 44 earn an annual median of $86,782, according to the BLS.
Costs will vary in that age bracket, as the average person may have dependents, which will affect living expenses and healthcare costs. BLS data suggest that median monthly spending includes:
- $1,983 on housing
- $921 on transportation
- $780 on food
- $250 on health insurance
- $352 on utilities
- $206 on credit card debt
That comes to an approximate monthly total of $4,500. Your emergency fund should be between $13,500 and $27,000.
How much should I have in savings in my 40s?
Households led by the average American between the ages of 45 and 54 earn a median of $100,213, according to the BLS.
At this stage of life, expenses are shifting as people start seriously planning for retirement, downsize as kids leave home, or the mortgage gets paid off.
“As you get older you acquire more stuff, maybe buy a house, maybe have children,” and likely end up spending more, said Steven Clark, a certified financial planner at Clark Financial Planning Services.
These life changes alter the balance you need in emergency savings. “As you get into your 40s and 50s, you may start thinking about going back to school, starting your own business, or changing careers. These things may require increased emergency savings,” he said.
For this age group, BLS data show that median monthly spending includes:
- $1,934 on housing
- $980 on transportation
- $773 on food
- $286 on health insurance,
- $383 on utilities
- $227 on credit card debt
That makes for an approximate monthly average of $4,580. For an American in their 40s, the average emergency fund should include between $13,740 and $27,480.
How much should I have in savings in my 50s?
Households led by someone between the ages of 55 and 64 earn an annual median of $85,037 according to the BLS. Factors that may change your costs include lower earnings but also potentially lower healthcare costs, as dependents have left home.
For this age group, BLS data show that median monthly spending includes:
- $1677 on housing
- $849 on transportation
- $658 on food
- $318 on health insurance
- $353 on utilities
- $204 on credit card debt
That comes to an approximate monthly total of $4,060; an emergency fund should hence be between $12,180 and $24,360. Snider recommended that those approaching retirement keep closer to six months of living expenses in their emergency fund.
Where should I keep my emergency savings?
Once you’ve figured out how much you should save, the next step is where to keep it. Most experts agree that emergency savings should be totally liquid as to be easily accessible.
Clark said he believes emergency savings should be highly liquid and safe. “My view is that having the money safe [and] easily available when needed is more important than the yield you are getting,” he said.
Certified financial planner Sallie Mullins Thompson echoes the sentiment, saying that the emergency fund must be totally liquid. “A savings account is best or a combination of savings account, with a ‘short’ CD ladder — three and six months of CDs — would work,” she said, adding to not use any mutual funds, stocks or ETFs.
Snider prefers his clients to keep emergency funds liquid in high-yield savings accounts. “I often recommend any of the online banks who pay upwards of 2%. Savers need to be mindful of account minimums in order to avoid potential monthly nuisance fees,” he said.
Deposit Accounts’ Tumin agreed that online savings account is a good combination of yield, safety and accessibility. “However, access speed should be considered when choosing an online savings accounts,” he said. “Electronic transfers from the online savings account to a checking account at another bank can take from one to three business days.”
Tumin advises that for greater accessibility, it makes sense to choose an online bank that offers both a high-yield savings account and a checking account. “This typically allows transfers from the savings account to checking account to be done without any delay,” he said.
Finally, another tip Clark has is that emergency funds should be in a separate account from your everyday checking and savings accounts. “You want to mentally separate the emergency funds from everything else so that you will be less inclined to raid them for non-emergency things,” he said.