The Really Quite Good Guide to Deciding What Level of Emergency Fund is Right for You

Level of Emergency Fund is Right for You Bear with Bandages

Today I have an emergency fund that allows me to sleep at night.  I didn’t start there, but I certainly worked my way through each level of emergency fund to where I am today.  From broke, desperate, and stressed to financial freedom.   We are all at different points in our financial journey, don’t be discouraged, instead let’s find what level of emergency fund is right for you.

Emergency Fund Levels

No Emergency Fund

The worst possible situation.  According to a Go Bank Rates 2019 survey 45% of all respondents had $0 in their savings.  So while this is one of the worst financial situations to be in the fact is almost half of Americans are in this exact spot.

I remember just yesterday when I didn’t have any money in my emergency fund.  If anything would have truly been an emergency I would have had to beg, borrow, and pray for a small miracle to hit my bank account.

No Emergency Fund Examples

If you have no emergency fund then the only way to pay for a true emergency like an unexpected car repair or emergency room visit is to put it on your credit card.  

In my personal financial experience this has been a recipe for disaster.  More debt means more interest and more interest more time in debt. It’s a vicious spiral and why I used to be scared to death of credit cards. 

The other most prominent option is to borrow from friends and family.  It’s a difficult situation to ask your family for money. What could be even more difficult is the obligation to pay them back.  

Missing a payment or not being able to pay back your debt to a big credit card company that makes billions of dollars is not ideal.   Missing a payment to a family member or friend, could affect your relationship and that can be even more scary and stressful.  Where there is borrowed money there is stress.

If you are currently at this level of emergency fund, don’t panic.  Just slowly start to scroll down.

Piggy bank dollar sign What Level of Emergency Fund is Right for You

Let’s save for an emergency!

I’m In Debt Emergency Fund

According to just over 300 million Americans are in debt.  So based on that number alone this is going to be the primary level of Emergency Fund for Americans today.  

What exact amount should your “I’m in Debt” emergency fund have?  For most people this is going to be $1,000. Not only is the four digit mark echoed by many personal finance experts including Club Thrifty and Dave Ramsey it can also be psychologically rewarding to see an extra zero at the end of your emergency fund.  What looks and sounds better $100 or $1,000?

When I work with my financial coaching clients one on one I tend to take the “I’m in Debt” emergency fund  on a case by case basis.  But it’s hard to argue against $1,000 when just starting out. 

I tend to take the “I’m in Debt” emergency fund  on a case by case basis but it’s hard to argue against $1,000 when just starting out.  At this stage of your emergency fund the money is not meant to help you sleep a full eight hours, it’s more like it allows you to take a nap.  

It’s more important to have funds available so your financial action plan isn’t knocked off course completely.

I’m In Debt Emergency Fund Example

When I work with coaching clients and the conversation comes around to what level of emergency fund is right for them, I ask a simple question.  What is your car insurance deductible?  It’s a great place to start as many emergency situations tend to happen with either your car, house, or health.  

If you were to get in a car accident and need to use your car insurance, this would still require a payment to meet your deductible.  In many cases they will pay you the insurance payout minus the deductible which is essentially the same thing.  

Insurance deductibles are a great place to start as  deductibles are often in the $500-$2,000 range and would be unique to your situation.

Of course there are multiple situations that occur that could be considered an emergency that are not car related.  Need a new air conditioner and you live in Florida? New furnace and you live in Chicago? The “In Debt” emergency fund is going to help you get through it.  It might now cover the entire balance but it also won’t cause a complete mental and financial breakdown.

The “In Debt” emergency fund is going to help you get through it.  It might now cover the entire balance but it also won’t cause a complete mental and financial breakdown.  Ultimately though we all want financial security.  We don’t want to stress about our financial situation.  We want to sleep through the night.

Piggy bank dollar sign What Level of Emergency Fund is Right for You

Sleep at Night Emergency Fund

Different levels of emergency fund savings have different amounts.  

What amount should a fully funded emergency fund account or what I call the “Sleep at Night” emergency fund have?  I don’t believe there is a one size fits all approach to an emergency fund.

The answer really is personal. 

The reason I call this level of emergency fund the “Sleep at Night” emergency fund is that whatever amount you choose really does allow you to sleep at night.  You shouldn’t be laying awake at night thinking of your emergency fund at all.

If you scour the internet the most common answers you will find include 3-6 months, 9 months, and even a 1 year emergency fund.  The amounts and number of months don’t matter, it’s really your personal situation.

How much should your emergency fund be?

What I suggest is to start thinking about larger scale emergency situations.  The most common is a job loss. Then start answering these questions:

  • How much money would you need to survive if you lost your job tomorrow?  
  • Also something to consider is how likely are you to lose your job (layoffs, high turnover rate at your employer, etc.). 
  • Do you have more than one income in your household?
  • Is your field of occupation easily employable (healthcare, software developer)

Once you start answering these questions you can get closer to understanding what amount of money will help you sleep at night in your emergency fund.

Those with more than one income in the household may feel more comfortable with a smaller emergency fund.  Having another source of income would mean a shift towards cutting back on discretionary expenses like travel and restaurants.  However if you are dependent on one income, a larger emergency fund could give you more financial peace of mind.

Sleep at Night Emergency Fund Example

I have already discussed the potential for a job loss as the primary situation.  However another common occurrence for emergencies is a health related emergency.

While it’s impossible to cover every single health related emergency in a savings account it’s important to consider this in your “Sleep at Night” emergency fund.

I often think of emergency funds in terms of insurance because that’s really what they are.  Now when you look at your health insurance through your employer or private company this is often met with an deductible or out of pocket maximum.  

These are great reference points to use when asking yourself what amount of emergency fund would allow me to sleep at night.  If your out of pocket maximum health care costs are $6,000 for the year, that’s a great number to include in your emergency fund.

If for example you couldn’t work for 3 months because of a health related emergency, then having 3 months worth of your expenses plus your out of pocket maximum health care costs could be your “sleep at night” emergency fund amount.  These are things that you need to consider when figuring out what level of emergency fund is right for you.

I’ve mentioned this but so much of personal finance is truly personal as everyone’s situation varies.  However whatever level of emergency fund you are at in your financial journey I truly believe you are in a better place by having one rather than nothing at all.

What Level of Emergency Fund is Right for You Recap

Levels of Emergency Fund

  • No emergency fund
  • I’m in Debt emergency fund
  • Sleep at Night emergency fund
Even Steven Money Steven Donovan Money Coach

I work with people who are ready to take action and change their financial lives. Is that you?

Struggling to create an Emergency Fund and reach your Financial Goals?

We are taught by a coach how to swing a baseball bat.  Teachers how solve Algebra problems.  But for many of us we did not get the guidance to manage our money and reach our financial goals like building an emergency fund.

If you are working to reach your goal of building an emergency fund and want a financial coach on your side, check out more about working with me as a financial coach.


How much money should I have in an emergency fund?

Most financial experts tend to lean towards 3-6 months of emergency fund savings.  I think personal finance is personal and tend to work with my clients to see what feels right to them or rather what will help them sleep at night.  Not every emergency can be covered by your emergency fund savings, but having enough set aside that can help you off the ground and get back to a normal life is key.

How much should I put in my emergency fund per month?

If you are in debt and have a goal of a $1,000 emergency fund simply adding $100 per month will take 10 months.  The important part of this is to track your expenses, create a spending plan each month, and include the amount you plan to save in the upcoming month.

Is a $1000 emergency fund enough?

If you are in debt many financial experts suggest a $1,000 emergency fund.  While I personally think each financial situation is personal my suggestion is to save an emergency fund equal to your insurance deductible.  This is most commonly between $500-$2000.

Where should I put my emergency fund money?

I personally keep my emergency fund in a high interest online savings account.  The money is ready and available and earns a relatively high interest rate compared to some of the big banks.  Also important I am not charged a fee for a low balance or taking my money out early.  I have my emergency fund housed at both Vanguard (Non-FDIC Insured), but I also like Ally Bank (FDIC Insured) as an option.

Disclaimer:  Like everything you read on the internet make sure to do your own research, remember I’m just a guy on the internet.  Trust but verify.

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Even Steven definitely knows his stuff, the FREE discovery call is a must.

    Steven Donovan

    Thanks for the kind words my friend.

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