Do You Need a 6-Month Emergency Fund?

Life has a way of throwing surprise expenses at us when we least expect them. You might wake up to take a hot shower, only to find out your water heater has decided to stop functioning. Or you could go to pull your car out of the driveway only to realize that a branch has fallen onto your windshield and shattered it to pieces.

That's why it's so important to have a fully loaded emergency fund. And for most people, that means having enough money in savings to cover three to six months' worth of expenses.

But should you be aiming for the higher end of that range? Or can you get away with less than six months' worth of bills in your savings account?

Why a six-month emergency fund could be the sweet spot

Your emergency fund isn't just designed to cover the cost of unplanned home or car repairs. It should also be there in case you wind up out of a job. The reason people are often advised to save a three- to six-month emergency fund separate from their checking account is that it could easily take you that long to find a new job after losing one. And the more unique your job is, and the more seniority you have in it, the more time you might need to get hired again following a layoff.

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So that's why a six-month emergency fund could make a lot of sense for you. That way, you buy yourself more time to find a new job without having to resort to debt to cover your expenses.

It could also pay to have a six-month emergency fund, as opposed to only a three-month fund, if you have a lot of expenses you can't easily shake. If you're single and have a month-to-month apartment lease, a three-month emergency fund may be fine. You could conceivably give notice and find a cheaper home in the event that it takes longer than expected to find a job after losing one.

But when you own a home, you can't just give your mortgage lender a month's notice and stop making payments on that loan. And if you have a family, it's harder to uproot a spouse and children than it is to move on your own.

So if you're not sure whether you need six months of bills in savings, think about your specific situation. If you worry that your job may be a harder one to replace and you have expenses you're pretty locked into, then you may want to aim for a six-month emergency fund for better protection and more peace of mind.

You may not need to save beyond the six-month point

There's no rule stating that you must stop building your emergency fund once you've got enough cash to cover six months' worth of bills. In fact, for some people, a 12-month emergency fund makes sense. And if you're self-employed or think your job would be extremely hard to replace, then you may want to aim for 12 months' worth of bills in savings.

But otherwise, a six-month emergency fund likely gives you the protection you need. So if you have money to spare beyond that point and are comfortable putting it aside for the long term rather than putting it into a savings account, you may want to consider investing it instead.

Over the past 50 years, the stock market's average annual return has been 10%. Even though many savings accounts today are paying somewhere in the ballpark of 4%, that's not the norm. And even 4% is considerably lower than 10%. So you don't want to overfund your emergency savings when there's the option to invest your excess funds and potentially grow them into a lot more money over time.