How Much Emergency Fund You Should Have: 6 Key Factors

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  • How Much Emergency Fund You Should Have: 6 Key Factors
Author: Joseph Reinke, CFA

Nobody wants to waste money.  When you have too much money in an emergency fund or its not in the right place then your money isn’t doing anything for you. Therefore, you are wasting it.

However, if you have too little in an emergency fund, you may be taking on a lot of financial risk.

That then begs the question: How much emergency fund should you have?

Some people respond to this question with a simple answer such as six months.  However, a cookie cutter answer maybe easy but its far from a good answer in regards to making your money work for you.

In this article, I’m going to answer how much emergency fund you should.

I detail the factors that go into it, how to maximize your emergency fund, and will include examples.

Emergency Fund Definition

Before getting started, we need to know exactly what is an emergency fund.

In short, its having enough money in the bank (Checking accounts, savings account, money market accounts, CDs, etc…) that you can cover your expenses for a certain period of time.

Time is most commonly associated with months.

For example, lets say you are using FitBUX’s financial planning technology and your emergency fund expenses add up to $2,000 per month.  If you want a three month emergency fund then you would need $6,000 in bank ($2,000 x 3).

What Expenses Are Included In Your Emergency Fund

You also need to know what is included in your emergency fund.

Any expenses that are required for you to have a roof over your head, heat, food, and water.

One major mistake people make is they include debt payments in their emergency fund.  Debt should not be included with one exception.

Any expense required to have a roof over your head should be in your emergency fund.  Therefore, if you own a home, you should have all expenses associated with owning it in your emergency fund.

These expenses include your mortgage payment, property taxes, and insurances.

Why Is An Emergency Fund Important

Before diving into how much emergency fund you need, I want to touch on one last item and that is the why, i.e. why is an emergency fund so important?

There are three primary reasons:

  • Stress: Not having money in the bank can cause major stress in your life especially when an emergency does hit.
  • Investments: Having an emergency fund for investments allows you to keep your other funds invested instead of liquidating them at the wrong time. The emergency fund also reduces risk in your overall financial profile. Therefore, you can afford to invest more aggressively relative to someone that doesn’t have a proper emergency fund.  This is so important that it is one of many inputs has included in our hybrid robo-advisor.
  • Part of your portfolio: All your money should be looked at as a whole. Therefore, your emergency fund plays a part of your investments which I detail more on this below.

The Two Biggest Factors In Determining How Much Emergency Fund You Should Have

Many ‘financial professionals’ stick to numbers when determining how much in an emergency fund you should have.

However, there are two factors that are head and shoulders above the rest.

What is the risk to your human capital is the first.  Human capital is a projection to your future income and the risk to it.

For example, someone with stable income such as a health care worker has lower risk relative to a real estate agent paid on commission.  Therefore, the health care worker can afford to have a smaller emergency fund relative to a real estate agent.

The second largest factor is what you feel comfortable with.  This is huge because the goal is always to make money compliment your life instead of dictating it.

Therefore, if having a larger emergency fund helps you sleep at night then do it!

How You Invest Your Emergency Fund Factors Into How Much You Need

Most people keep their emergency fund in a high yield savings account. (Note: If you are going to do this I suggest doing so via an online account, they pay more.)

However, as I previously mentioned,  you should look at your emergency fund as part of your investment portfolio.

I also know the probability of using an emergency fund is low, i.e. if you have a six month emergency fund, the probability of using more than two months of it at one time is low.

Therefore, in my opinion a lot of people have “dead money” that is just sitting in the bank doing nothing for them.

Therefore, I look into how you can invest it below.

Combo High Yield and Checking Account

Checking and many savings accounts are only paying 0.25% right now.  However, there are many online high yield accounts paying close to 4%.

Therefore, you should be splitting the funds up.

For example, you may keep two months of expenses in a checking account for easy access while keeping the remaining amount in a high yield account.

If you are trying to keep it simple, this is a great way to go.

The Emergency Fund As Part Of Your Investment Portfolio

For those that want to take it one step further, you should be looking at your emergency fund as part of the conservative portion of your investment portfolio.

Money management consists of having a conservative allocation and an aggressive allocation for your portfolio.

You can use your emergency fund to satisfy part of your conservative allocation.

You do so by using a technique called a ladder.  The most common is using a CD Ladder.

In short, using a CD ladder gives you a guaranteed rate of return, guaranteed principal in case you need it for an emergency, and FDIC insurance.

Most importantly, it reduces the risk to your portfolio because the price doesn’t fluctuate and alternative conservative investments do.

Having A Roth IRA Reduces The Need For An Emergency Fund

Using a Roth IRA for your emergency fund is one topic that our FitBUX Coaches are frequently asked about.

The reason being is you can take out whatever you put into the Roth IRA with no penalty.  For example, if you’ve contributed $20k in a Roth IRA and its now worth $30k, you can take out $20k and there is no penalty.

Therefore, I have no problem using a Roth IRA for an emergency fund.

However, just like I discussed above, you need to look at it from a wholistic portfolio point of view.  This means you should have an amount in your Roth IRA that is conservatively invested in something like the CD ladder above if you are going to use it as part of your emergency fund.

In summary, the more money you have in your Roth IRA, the lower the need for a lot of money in a checking account for your emergency fund because you can access that money without penalty.

What you wouldn’t want to do is have a small balance in your checking account while only having a small amount in your Roth IRA invested in stocks.

For example, you do not want to be a new grad with $3k in an emergency fund and $2k in your Roth IRA that is invested in the stock market.

The reason being is that you may have an emergency and have access the funds in your Roth IRA right when the stock market tanks.

Should I Reduce My Emergency Fund To Pay Off Debt Faster?

Most of the time, the answer is no.

I’ve seen soooo many people have a ‘minimal’ emergency fund just so they can repay debt faster.

Then they have an emergency and they end up with more debt than they had previously.

Therefore, get your emergency fund first then pay off the debt aggressively.

With that said, there is one exception.  High interest personal loans or credit cards.

These items have such large interest rates that it may be impossible to build any type of wealth with them around.

Therefore, pay them off first.

The ultimate action for credit cards would actually to do a 0% balance transfer, save for the emergency fund, then target the credit card debt.


How much you have in an emergency fund isn’t as cookie cutter as most people think.

In short, if you are trying to keep it simple, use the approach where you have some money in a checking account and the other amount in a high yield online savings account.

You should always factor in what your income looks like, other financials such as how much is in a Roth IRA, and most importantly what makes you feel comfortable.

If you’d like help determining how much you need in an emergency fund and help maximizing it, be sure to become a premium member of FitBUX and use our new financial planning technology built for young professionals.

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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