I Make $40,000 a Year. What Emergency Fund Do I Need?

You never know when you might end up having to bear an expense you weren't planning for. You could get into a fender bender and wind up on the hook for a $500 auto insurance deductible. Or, you could wind up spending $400 on a medical bill or $600 on a home repair without any warning.

That's why it's so important to have a solid emergency fund. Unfortunately, 63% of Americans don't, according to SecureSave. That percentage of U.S. adults isn't equipped to cover a sudden $500 expense.

The problem with not having enough emergency savings is that you risk having to resort to costly credit card debt when unplanned expenses arise. And that could really harm your finances for a long time.

If your household income is $40,000, you may be wondering what sort of emergency fund is reasonable for you, or what total you should be aiming to save. And the answer is, it isn't your salary that matters when calculating your emergency fund. Rather, it's the amount of money you spend each month on essential bills.

How to calculate your emergency fund needs

When it comes to building an emergency fund, most workers are advised to sock away enough cash to cover three to six months of essential living expenses. The reason for this is that if you were to lose your job, an emergency fund of that nature might suffice in getting you through a period of unemployment without having to resort to costly debt.

But because your emergency fund should be a function of how much you spend monthly, your salary shouldn't really be a factor. Of course, if you earn $40,000 a year, you probably need a smaller emergency fund than someone who earns $100,000, because chances are, your expenses are lower. But the best way to calculate your emergency fund needs is to look through your credit card and bank account statements and figure out how much you spend each month on essentials.

Some expenses you'll want to account for include:

• Rent or mortgage payments
• Car payments and insurance
• Utilities, such as electricity, water, and internet service (this is an essential expense because your kids might need it for school and you might need it for job-hunting purposes)
• Healthcare
• Groceries

Once you've figured out how much you spend monthly on essentials, multiply that figure by at least three. That's your minimum emergency fund target. So if, for example, your essential monthly bills come to $2,400, your minimum emergency savings target should be $7,200. And for better protection, you may want to aim for six months' worth of expenses in the bank.

Building emergency savings could take time

If you're starting with little to no money in savings, then it could take a while to build a complete emergency fund. And that's OK.

Let's say you're aiming for $7,200 in emergency cash reserves and are starting with $1,200. If you earn $40,000 a year, you're probably not going to manage to save $6,000 more in a couple of months. But you might manage to save $6,000 in a couple of years with savvy habits, like minimizing non-essential spending.

Another thing you can do to make swifter progress on your emergency fund is join the gig economy. If you work a side job for a year or so, you can put your new extra income into savings. Just remember to set some of that side hustle income aside for the IRS if your wages aren't taxed off the bat.

The amount of money you need in emergency savings depends on your personal spending. But do your part to build those cash reserves so that the next time you encounter an unplanned expense or find your job on the chopping block, you're not automatically doomed to land in debt.