How Small Or Large Should Your Emergency Fund Be

The emergency fund is one of the key components to your ability to achieve financial independence. The amount you put aside covers you against unexpected expenses and ensures you're able to stay on track towards your financial goals with minimal disruption. However, there's always questions around the sizing of the emergency fund and it's hard to know how much you should keep aside just in case that rainy day comes.

How much you keep in an emergency fund, be it 3 months of expenses, 6 months, or more, really comes down to your own personal level of comfort with handling unexpected costs in life. Based on your financial situation the sizing of your emergency fund could vary, for example if you have multiple sources of income then the fund could potentially be smaller since you're less likely to lose all of your income at the same time. However if you're about to undergo some risky transition in life you might decide to keep more aside just in case.

What is an emergency fund?

An emergency fund is an amount of money that you keep aside to cover unexpected costs that sometimes pop up in life. Its sole purpose is to minimise the impacts of these events to your normal everyday life.

Depending on your personal situation the events that are considered "emergencies" can vary - but here are some basic examples that I'm sure more people can relate to:

The MOT test has revealed some fixes are required on your car in order for you to keep driving it?

Sudden hole in the roof of your house after a stormy night?

Been let go from work after the company did a restructure?

Your pet has become injured and you didn't have pet insurance?

The reasons for any of the above to be considered an emergency is that they can't really be left as they are for an extended period of time because it would have a seriously detrimental impact that wouldn't be worth the "money saved".

For example, if you can't drive you might not be able to easily get to your workplace or take the kids to school. Rain will get through the hole in the roof causing even further damage to your home, and ultimately costing even more in repairs. And obviously without a job you might not have enough, or any, income coming in.

Therefore, whether you like it or not, you're going to need to get these situations resolved and the emergency fund you've set aside simply makes that process a whole lot easier and less stressful.

How to build your emergency fund

Like all great things about money the way to build an emergency fund is with a bit of planning, discipline and consistency.

Start with getting your budget established so that it covers the essential things in your life - this means the things that are required for a basic standard of living such as housing costs, bills, groceries, debts and so forth.

Once that is set up in a way that works for you, you can then start to put the remaining amount of your income towards other things that aren't quite as essential.

Note that non-essential doesn't mean not important - and the things that fall in this category would be your savings, investments and your emergency fund.

Arrange where your money goes based on your current situation and the priority. For example if you have nothing in your emergency fund then its priority should be quite high, because it means you're currently not able to handle any unexpected costs without it affecting your normal everyday life.

As the emergency fund builds up you can then start to reprioritise so that more money is being put into your savings and investments instead, or even other things in your budget.

This can happen even if your emergency fund isn't "full" just yet, where you might reduce the amount of money being put into it each month. You might do this for any number of reasons but ultimately it comes down to your own judgement on the financial risks you face and your ability to handle them.

Where to keep your emergency fund

You never know when a financial emergency will happen, so the money you keep in an emergency fund needs to be quickly accessible yet be in a safe place where the value can be somewhat maintained.

At the same time it cannot be so easily accessible that it becomes tempting to spend some of the money every now and again - while you make a promise to your future self to put the money back.

Based on this I have come up with 5 principles for the suitable place to keep an emergency fund:

  1. It must be accessible quickly and on short notice

  2. It cannot be mixed in with money that is used day-to-day

  3. It cannot be at risk of losing value quickly

  4. There should be no penalty for withdrawing or getting to the money

  5. It must be protected for a minimum amount

The list of principles will be mostly common sense and obvious but by listing them out like this it helps to avoid certain options such as the stock market, valuable possessions (gold jewellery etc), or even as cash stuffed into "safe" places of your choosing.

My personal advice would be to keep it in an account that is separate from your normal day-to-day account where you keep your spending money. This separation protects you from overspending - accidentally or not - the money in your normal account and chipping away at the balance in your emergency fund.

I would also advise that you open that separate account with a financial institution that is different from the one you use for your normal banking services. This is so that your emergency fund can get the full Financial Services Compensation Scheme (FSCS) coverage which adds a layer of protection for your money.

Author's note: The FSCS generally applies to the UK only. If you're outside of the UK you will want to research if there are any equivalent schemes for your own country or region.

While you avoid potential fluctuations in value by keeping the emergency fund out of the stock market there's always going to be some level of exposure to economic forces - notably inflation.

This is just something that needs to be accepted under normal economic circumstances in exchange for a high level of confidence that your money is going to be there when you need it. Perhaps trying to pick out a type of account that might offer a slightly higher rate of interest is one method of mitigating this, but these days, at time of writing, those options seem to be in short supply.

How much should you keep in an emergency fund?

Now that you know what an emergency fund is, how to build one, and where to keep it, the next question you might be asking is "How much should I keep in my emergency fund?"

I would say that the absolute minimum you should have is 1 months worth of expenses but you're not going to be able to handle the worst of situations. Extended periods out of a job or a doubling up of unexpected costs could put you under immediate financial strain.

A more normal amount - broadly based on material found and shared within the financial independence community - would be around 3 to 6 months of your living expenses, and personally I'm in agreement for using this as the initial benchmark.

As a general rule of thumb, if you have 6 months of living expenses set aside into your emergency fund you're going to be in a much stronger position financially than the majority of other people.

When can you have a small emergency fund?

If the benchmark is 6 months of living expenses then my definition of a "small emergency fund" would be half of that amount - meaning 3 months of living expenses.

1 months of living expenses is too small as I mentioned earlier and I think the 3 month mark is typically where someone can start to "relax" a little more in terms of their ability to deal with an unexpected cost.

But what factors come into play that allow a 3 month emergency fund "sensible" for an individual?

What happens if you keep your emergency fund small but then get hit by a multitude of unexpected cost events that make you wish you had more money set aside?

Well, while you can never know what will exactly happen in the future it's all about measuring your own risk, exposure and personal comfort.

If you're in a stronger financial position overall then you might be able to come to a conclusion that you don't actually need so much money set aside for an emergency after all as you feel you're going to be able to handle some of the smaller emergencies as mere inconveniences.

While the range of scenarios is going to vary from person to person - or family to family - here are some examples that could help you decide that a small emergency fund is sufficient.

1. You have multiple sources of income

A particularly large financial risk for most people is the sudden and complete absence of regular income.

The money you earn and bring in each month is what you rely on to keep funding your life, and until you manage to reach financial independence you're going to be dependent on that income continuing to come in.

However if you've managed to find ways to earn money regularly from more than one source then you're going to be at less risk than someone who solely relies on just one single source of income.

This is because it's less likely that your income will stop completely, meaning you're able to keep funding your living costs to some degree even if you lose one of those sources of income.

Through a combination of becoming a bit more frugal and applying effort to increase earnings from remaining income sources while looking to replace the source of income that was lost, you might find it sufficient that a smaller emergency fund is actually capable of carrying you further than it would've for someone else who was more at risk of total loss of income.

Be careful if a large majority of your income comes from one of your sources however, as your risk and exposure would very much be placed on that single source despite there being other supplementary income.

2. You are completely debt free

Not being able to continue paying your debt while in a difficult financial position is one of the worst combinations because not only are you in a bad spot, it's actually getting worse - and probably rapidly.

You have control of your living expenditure and the "burn" on your reserves is linear, but with debt the interest payments mean that whatever you owe will continue to increase - exponentially - if you keep missing the payments.

However if you no longer have any debts - including low interest debts or "good debts" like your mortgage - then you might find it acceptable to keep a smaller emergency fund at hand.

There's also less of a psychological burden when you have no debt but need to deal with a financial emergency.

It would still be a financially inconvenient situation - nobody's ever happy when they have unexpected costs - but the lower levels of financial commitments mean you're able to accept a little more exposure in general.

3. You don't have any big expenses planned

One of the main reasons for keeping some of your money out of the stock market is if you have a big important expense planned - this is to protect that money from being at risk of (temporarily) becoming lower in value due to fluctuations and therefore affecting your ability to afford that expense.

Typically these big ticket items involve the likes of weddings, buying a new home, a more expensive holiday, buying a car, or having a baby.

In a similar manner, a more normal sized or even larger emergency fund might be advised so that you're further protected from any unexpected costs that could impact your ability to proceed with these planned expenses.

However, if you don't have any plans for these types of expenses - or if you've already made them and paid them off in full - then you might see no reason to keep as much money in your emergency fund anymore.

When should you have a large emergency fund

Now that we've covered a few examples of why you might keep a small emergency fund let's take a look at the opposite side of the same coin.

For reference, I consider a large emergency fund to be at least double the amount of a 6 month emergency fund - meaning we're talking about a minimum of 12 months living expenses.

When it comes to larger emergency funds there are going to be a couple of reasons why you wouldn't want to have one - the most common being:

  1. More of your money is going to be losing value over time due to inflation

  2. The excess money could be put to better use where there are more opportunities for it to grow, i.e. investments in the stock market

Like with all things personal finance it all comes down to what's going on in your life and will be based on your own judgement of what is "good risk management".

An example that I wouldn't consider good risk management is if someone keeps a large emergency fund purely because they're more nervous by nature. There is a sensible limit to risk aversion and I would say the opportunity cost from not going with a normal sized emergency fund would render any advantages of the larger emergency fund meaningless in the long run.

That being said, there can be a few good reasons on why you would want to consider building up your emergency fund so that it's larger than normal; here are some examples that I think make sense:

You're transitioning your life to something completely new

This could mean various things but an example - based on personal experience - could be that you've decided to move to a new country to try and live there instead.

Moving to a new country involves a number of different things - many of which will be dynamic and cannot completely be handled ahead of time. There will be questions to answer on-the-fly like will you be able to find work in your new country of residence, will you be spending more than expected, will you need to suddenly come home for whatever reason, plus many more.

In short - it's a period of your life where things are simply a little less certain and you're slightly more exposed.

That won't always be the case of course since you'll slowly become more accustomed to your new home, but while that's still happening I would consider it very reasonable for you to hold a slightly larger emergency fund just in case.

This applies to any sort of "life transition" where you're leaving something that's familiar in pursuit of something that isn't.

You have a young family

If you're young and single you're arguably much more capable of handling "being broke".

Can't make rent - try couch surfing or move back home.

Haven't got much money to buy food - beans on toast.

Struggling to find a job - do a personal project.

There's obviously some situations that are going to be dire no matter what - but in general you're going to have more options when you're still playing the game of life solo.

That's probably not the case if you're in a young family, especially if you've just had a new born child. When member #3 or more joins the family the last thing you and your partner wants is the looming possibility of not being able to maintain payments on living expenses.

"What will the baby eat next week if we pay the rent?" - even just thinking about this scenario is heart-wrenching.

As such, in my opinion it's absolutely acceptable to inflate your emergency fund just to give yourself and your young family a bit more assurance in life.

You're retiring soon

As followers of the financial independence movement we're all looking forward to the day where we can finally "pull the trigger" - yet the one more year syndrome is all too real.

"What if I've under-estimated my FI number?"

"What if the market has a big crash right after I retire?"

"What if I have to use my emergency fund early on in my retirement?"

There is also the issue of "sequence risk" where the timing of your withdrawals from your investments and retirement accounts could - if timed unfortunately - be detrimental to your overall financial health in the long run.

While most of these concerns can't be controlled and is purely down to "luck" you can somewhat mitigate by giving yourself a longer runway before you need to dip into your retirement savings.

I suppose in this scenario you're not actually increasing your emergency fund - rather you're just building up some funds to support the first year or two of your retirement - but if you plan things out ahead of time then you can consider that excess cash to be an extra buffer until the time comes to use it as normal day-to-day spending money.

Final Scribbles

Ultimately the size of your emergency fund is going to be determined by three main factors:

  1. Self-confidence in your ability to handle unexpected costs

  2. Personal preference - within reason

  3. Your current financial standing relating to debts and income stability

Assess your situation and use your knowledge of your own personal situation to make a measured judgement call on what is appropriate. The most important thing is that you have an emergency fund so that you're able to deal with unexpected costs to some degree.

At the same time, always keep in mind that there's always going to be some level of exposure no matter what - even if you saved up a huge emergency fund there could be something so extreme or unexpected that you're unable to handle it in one go.

Under such circumstances it probably wouldn't have been better for you to have more money set aside, but rather it would simply be more beneficial to have a deeper financial understanding and principles which would arm you with all the skills and abilities required to get through it.

At the end of the day when it comes to any financial difficulty you - and only you - are your last line of defence.


Don't wait for some magical number before you start "living". Life is full of surprises and you'll never be able to plan it perfectly. If you're doing sensible things with your money you'll eventually reach your goal. So start living now. The longer you wait, the less time you'll have. Money can be made, but time cannot. You are the barrier to the life you want to live, not a 4% safe withdrawal rate.

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