How much should I have in my emergency fund?

No one knows what the next crisis will be, but whatever it is, having a safety net will help make it easier to weather.

• At the very least, you’ll want three to six months of living expenses saved in case of emergencies. There are two ways to approach this calculation. One is to assume the monthly paycheck disappears. This doesn’t mean you need to save three to six months of your salary. The idea is that if you were to lose your job, you should have enough saved to cover three to six months of necessary expenses like rent or mortgage, food, utilities and insurance.

The second is to assume the monthly paycheck continues, but an unexpected large expense happens like a car repair, medical bill or major urgent home repair. Knowing the difference between your income and monthly expenses, how large of a savings bucket would you need to prevent you from overdrawing your monthly income to cover that surprise cost?

• If you don’t have enough to cover at least three months of expenses in a savings account right now, make it a priority to get there. That may mean putting off other purchases and major travel until you’ve accumulated enough to cover your basic needs for a short time.

• On paydays, see how much money you can funnel into this account while still leaving enough income to cover your necessities. To make the process easier, set up an automatic transfer on paydays from your checking account to a savings account—you’ll save first and spend second, which is the key to any successful savings plan.

Investing your emergency fund

Where you put this money is another consideration.

• Initially, you may want to start with the safest place possible, such as a bank savings or checking account. They are traditionally very secure, but unfortunately, those accounts often pay little or no interest. Which means, depending on inflation, you may lose money over time.

• Consider stashing your cash in a money market fund that may yield more in dividends, such as the Thrivent Money Market Fund². The Fund typically requires a $2,000 initial investment for non-retirement accounts, but you can start lower by setting up a $50-per-month automatic investment plan to get you started.

• As your emergency fund grows, you might want to move some of it to a place that offers some growth opportunity. If you’re earning a good salary and contributing a lot each month, your emergency fund might eventually balloon to between $25,000 and $50,000, or more. Over time, with inflation at about 3% per year³, the value of your savings will actually decline if you aren’t earning at least that much in interest or dividends each year.

• When you have a substantial amount of emergency savings to work with, consider shifting some of it to a conservative mutual fund, such as the Thrivent Moderately Conservative Allocation Fund, to give your safety net the potential for growth. This Fund is the most conservative option in Thrivent Asset Management’s suite of asset allocation funds, seeking long-term capital growth while providing reasonable stability of principal. Of course, asset allocation funds can lose money, but they do offer greater diversification than individual securities or traditional equity funds that invest almost entirely in stocks. While diversification can’t prevent losses, it may mitigate some of those losses in a down market.

• Although it may be tempting to invest your emergency fund earnings in something slightly more aggressive, that could defeat the purpose of having an emergency fund. If your fund takes a big dive in a bad market, it may essentially wipe away much of the money you’d been counting on for a rainy day.

Develop a spending strategy for your emergency fund

If you need to use your emergency cash, it helps to develop a spending strategy. You may decide to spend down any cash you have in a bank account or money market fund first. Then, if necessary, turn to the cash you have invested in conservative mutual funds.

If you ultimately need to tap into your emergency fund, make it a priority to replenish it after you get back on your feet. Set aside money at regular intervals until you’ve reached your target fund amount.

Over time, having an adequate emergency fund can give you peace of mind and a fallback plan in case of a job loss or market downturn. Once you’ve built up a generous reserve, keeping the money in the right place can help you maintain its value.

¹ The Federal Reserve “Economic Well-Being of U.S. Households in 2023,” May 2024.

³ US Inflation Calculator “Current US Inflation Rates: 2000-2004” June 2024.