Financial Rules of Thumb: The Emergency Fund

April 11, 2025

People measure everything from their daily steps to how many hours they sleep and even how many calories they burn while they are sleeping. So, it’s no wonder that people wonder if what they are doing is considered “normal” in their finances. We like knowing where we stand and how we measure up compared to our peers.

But really, who’s to say what’s normal — is there even such a thing? This is why we have rules of thumb in the financial world. And while there are exceptions to all of the rules, they are generally good guidelines to help make decisions. For example, one of the more common rules of thumb is the importance of establishing an emergency fund (often called a nest egg or rainy-day fund).

How much should you have in your emergency fund?

Rule of thumb = three to six months of your expenses

While you may need more if you own a home that could be hard to sell, work in a highly volatile or specialized field or have a large family dependent on one income, this is a pretty good gauge of things to make sure you’re protected. Twelve months might even be more appropriate when real estate prices plunge, or jobs are a little hard to come by. There is no guarantee how long it will take to find new employment or sell homes if they are worth less than the mortgage.

What’s the emergency fund for?

Get you through an unexpected loss of income

The emergency fund’s primary purpose is to ensure you have the money you need to cover all your core financial expenses if you or your partner loses a job. Being unemployed is stressful enough, so it’s nice to know that you have money set aside so you don’t have to accumulate a mountain of credit card debt or miss payments that can impact your credit score. These savings will ensure this unfortunate event doesn’t cause too much long-term financial damage.

If the loss of income is more permanent, it’ll also give you time to adjust to a new reality, allowing you to keep paying your bills until you’re able to reduce them through cancellation or adjustment of service, sale of your home, or termination of your lease, etc.

Large unexpected one-time expenses

While you should be budgeting for most non-recurring expenses like home maintenance, pet illness, healthcare bills, etc., there are always things that come up that just can’t be planned for beyond having the proper insurance to minimize the impact. That said, it’s better to tap into these savings than it is to get into credit card debt that’ll amass hefty interest charges.

What it’s not there for

It’s NOT your piggy bank to tap into when you feel a spending itch or paying for expenses that you should plan for through your normal budgeting process like vacations, holidays, etc. Instead, this emergency fund is your safety net and can leave you in pretty bad financial shape if you don’t have it when you need it (and you will). That’s why the best emergency funds are those that are held in a separate account that’s a bit harder to access and remains untouched except in times of true emergencies. Once the emergency has passed, emergency funds must be brought back up to their necessary amounts to protect against the next thing!

So what do you do if you don’t have an emergency fund yet?

Figure out your monthly fixed expenses: First, you need to know how much you should be aiming for. If you don’t know your monthly fixed expenses, that’s a great start. Our Expense Tracker tool is one way to figure that out, or you can use online tools, which will link directly to your accounts and download your spending. That exercise can also help you figure out how much you can afford to save each month.
Open a separate savings account: Trust us. You’ll want to keep it separate to make it harder to tap into.
Automate your savings: Set up a direct deposit or automatic monthly transfer to your separate savings account. Your payroll department may be able to even take money directly out of your check and deposit it for you. Otherwise, set the transfer for payday so you never even have the temptation to spend the money. Don’t beat yourself up if you’re still working on getting your emergency fund fully funded, as this takes some time.

Now don’t let the math freak you out. Six months of expenses is a big chunk of change! Start first by trying to get $1,000 in your account. Maybe start with $25 per paycheck. After that, aim for three months worth of your mortgage or rent payment. Then, tack on three months of car payments, utilities, etc. If you have any little windfalls like a tax refund or won on that scratch ticket your friends got you for your birthday, use that to get you there sooner.

Finally, it’s important to reassess the amount needed in your emergency fund when you have significant life changes such as the birth of a child, a new home purchase, or even an empty nest when the amount needed may actually decrease.

The bottom line is an emergency fund is your first line of financial defense against life’s little twists and turns. Even if you’re working to pay off credit card debt, it’s important to start your emergency fund to help you avoid derailing your debt pay-off plan should an unexpected expense arise. Don’t delay. Start saving today.

to all of these rules, they are generally good guidelines to help make decisions. Similarly, there are financial rules of thumb in the financial planning profession that we then customize to each person’s goals and values. For the next several weeks, I’ll be sharing six that we regularly use at Financial Finesse to answer these common questions:

How much should I have in my emergency fund?
How much do I need to save for college?
How much do I need in order to retire?
What percentage of my income should I save?
How much life insurance do I need?
How much house can I afford?

Let’s start with number one. How much should you have in your emergency fund? The general rule of thumb here is three to six months of your expenses.

However, you may need more if you own a home that could potentially be hard to sell, work in a field that is highly volatile or specialized or have a large family dependent on one income. When real estate prices plunged along with a lot of people’s job prospects during the last recession, twelve months would have been more appropriate. That’s how long it took many people to find new jobs when selling their home wasn’t an option because suddenly their houses were worth less than the mortgage.

The emergency fund’s primary purpose is to get you through an unexpected loss of income while causing as little long-term financial damage as possible. That’s why it’s also one of my personal financial ground rules. It’s also supposed to give you time to adjust to a new reality should you have a permanent change in income status, allowing you to keep paying your bills until you’re able to reduce them through cancellation or adjustment of service, sale of your home or termination of your lease, etc.

It’s NOT really intended to be what you tap for things like non-recurring but necessary expenses like home maintenance, new appliances, veterinarian bills, etc. Those should be worked into your everyday spending plan. The best emergency funds are those that are held in a separate account and remain untouched except in times of true emergencies. And once the emergency has passed, they are brought back up to their necessary amounts to protect against the next thing.

So what to do if you don’t have an emergency fund yet? First, you need to know how much you should be aiming for. If you don’t know what your monthly fixed expenses are, that’s a great place start. Our Expense Tracker tool is one way to figure that out, or you can use a free online tool such as Mint.com, which will link directly to your accounts and download your spending. That exercise can also help you figure out how much you can afford to save each month.

Then you just need to automate it by setting up a transfer to your separate savings account. Your payroll department may be able to even take money directly out of your check and deposit it directly. Otherwise, set the transfer for pay day so you never even have the temptation to spend the money. That’s what I do. (And yes, I’m still working to get my emergency fund fully set up, so don’t beat yourself up if this takes some time.)

Now don’t let the math freak you out. Six months of expenses is a big chunk of change! Start first by trying to get $1,000 in your account. I started mine with just $25 per paycheck!

After that, aim for three months worth of your mortgage or rent payment. Then tack on three months of car payments, then utilities, etc and if you have any little windfalls like a tax refund or you won the 50-50 drawing at your kid’s basketball game, use that to get you there sooner. Finally, it’s important to reassess the amount needed in your emergency fund when you have big life changes such as the birth of a child, new home purchase or even an empty nest when the amount needed may actually decrease.

The bottom line is, an emergency fund is your first line of financial defense against life’s little twists and turns. Even if you’re working to pay off credit card debt, it’s important to start your emergency fund to help you avoid derailing your debt pay-off plan should an unexpected expense arise. Don’t delay. Start saving today.