How much emergency savings do you need? Use this simple formula

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Emily Pandise
·5 min read
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When it comes to saving, it’s easy to only think in the long term — things like buying a house, retirement or your kid’s college fund. But your short-term savings can be a crucial lifeline, or at least a buffer between you and an overdue credit card.

Short-term savings might sound like a professional finance term, but it really means any money you are setting aside for use in the next three years or so. Depending on your financial goals, that could be anything from fixing your gutters to a buying a new laptop for your kids. Knowing when you will need the money can help you figure out how to manage it. Here’s everything you need to know.

Your emergency fund should be your first short-term savings goal.

Before you start saving for anything else, experts recommend you focus on your emergency fund, the three-to-six months of cash to pay your essential bills in case you lose your job, are faced with an unexpected medical bill, or another expense that could send you into serious debt.

“Your short-term savings goal is not your vacation, it’s not your boots, it’s the cushion that gives you the foundation to make good decisions,” said Stephanie Ruhle, NBC News senior business correspondent. “As boring or as not sexy as (an emergency fund) sounds, you need to understand how important it is. Not having that emergency savings is why people, especially women, stay in bad jobs or bad or unsafe relationships.”

Lynnette Khalfani-Cox, The Money Coach, agrees. “You can't afford not to save, because you really will put yourself in a much bigger hole financially if any kind of unexpected events or emergency strikes. And the reality is, something is going to go wrong,” she explained.

Related: Vanessa Moore's 2021 financial goal is to build an emergency savings that will support her family in the event that she loses her job.

Do the math to help guide your saving.

An emergency fund, according to many experts, should be enough to cover your most essential bills for a couple of months. “Ideally you’d love to have six months of your baseline bare minimum expenses, if not that then three months,” said Ruhle. To find out how much you need to save, “look at your bills at the end of the month and find the must haves you need to pay for.”

Add up the cost of your essentials, like rent or mortgage, utilities, phone, groceries and healthcare, and multiply that amount by the number of months you want to save up.

If a high number makes you nervous, remember to start small. If you can only afford $100/month, start there and work your way up, even if it takes a while. “All of our situations change, look at what the pandemic has done to us,” explained Ruhle. “None of us thought we’d have the year we did. Instead of saying it won't happen again, use this experience to ask how you’re going to prepare yourself.”

You can also work backwards from your savings goal to find the right number to sock away. For example, if you want to save $500 for holiday gifts from April 1 to December 1, you would need to set aside about $60 per month to reach that goal.

Related: TODAY's money maven Jean Chatzky helps individuals discover $400 to put toward an emergency fund.

If you’re low on cash, take a close look at your spending.

Khalfani-Cox recommends combing your credit and debit cards statements if you feel like you can’t afford to save. There may be a few extra dollars hiding in there. “A lot of us are spending on things that we don't even realize. It's being automatically debited out of your checking or savings account or it's going onto a card,” she explains. “You start to add it up and every little bit helps.” Khalfani-Cox also advises creating more income by selling things you don’t need, creating a shop on Etsy, or turning your hobbies into side hustles.

Related: Looking to build up your savings or pay down debt this year? Follow these simple steps to help achieve your goals.

Keep it liquid, but not within easy reach.

While you’re building up your savings, consider keeping it in a high-yield savings account. Even though interest rates are low right now, when rates do go back up, some high-yield savings accounts can offer up to 2 percent interest, which will help your money grow with no risk.

One place not to keep your emergency fund? The stock market. “The whole point of an emergency fund is to be able to have very quick and easy access, so-called liquidity,” said Khalfani-Cox. "The risk factor for your money potentially going down or you losing money at any time, that's not the strategy for ... an emergency fund.”

She also recommends keeping your money in a separate bank or credit union from your regular checking account. “You really want to focus on safety and security, on account segregation, so that you're not mixing those funds with your normal day to day, checking or savings account. You really want to earmark the funds and designate it specifically and solely for emergency purposes.”

Related: Here are the best ways to save for retirement in all stages of life.

How to calculate your emergency savings fund

  1. Find your “bare necessities” living expenses, and write down how much you spend on them each month. This should include your rent or mortgage payment, utilities, groceries, etc.

  2. Add up the total monthly dollar amount of your necessities.

  3. Multiply that lump sum by the number of months you want to save for — many experts recommend 3-6 months, depending on your job security.

  4. Divide that number by however many months you have until your target deadline. Divide that by the number of paychecks you receive each month — that’s how much you should aim to set aside each time you get paid.

  5. Get excited about your new goal!