The Median Emergency Fund Has $5,000. Is That Enough?

There's a simple way to figure out how much you need.

Ask people about the best way to use your extra cash and you'll probably get a lot of different opinions. That makes sense, since everyone is in a different financial place and has their own set of goals. But no matter what you hope to achieve, you need an adequate emergency fund to protect you against unexpected bills.

Many workers already have some emergency savings, with the median amount being about $5,000, according to a recent Transamerica survey. But is that actually enough? Here's how to find out.

It all depends on your expenses

There are no hard-and-fast rules for how much you should keep in your emergency fund, but one of the most often-cited guidelines is at least three months of living expenses. For most people, this will probably amount to several thousand dollars, but it could be more or less than $5,000, depending on your lifestyle.

Three months of expenses might seem like a lot, but you can burn through that quickly in an emergency. Let's say a tree falls on your house. A home insurance company will probably cover this, but you'll have to pay your deductible first. That could easily be anywhere from $500 to $1,000 or more. You may also have to take immediate actions, like tarping or temporarily filling holes and replacing damaged items. The insurer might reimburse you for those eventually, but in the immediate aftermath, you could be on your own.

If you don't have an emergency fund, you might have to charge these costs to a credit card, and that could lead to you carrying a balance. Once you fall into a cycle like this, it can be difficult to get out of. So it's best to avoid it whenever possible.

If you don't have any emergency savings right now, three months of expenses is a good target to aim for. You have some flexibility in how you calculate your monthly expenses. You could include everything you normally spend in a month or just the essentials. But you should note that if you do the latter and then you lose your job, you might have to tighten the belt until money's coming in again.

Some people prefer to save even more than three months of living expenses. That's up to you. This could be smart if you think it would be difficult for you to find a new job if you lost yours. Some people also feel more secure saving a little more when the economy is struggling.

How to build your emergency fund

A high-yield savings account is the best home for your emergency fund because it gives you easy access to your cash when you need it. And you can earn some interest on your money too. If you don't already have one of these, now's the time to open one. There are plenty of options these days that don't charge any maintenance fees or have minimum balance requirements.

Once you have your account set up, decide how much you can afford to save per month. You could manually transfer the money or set up automatic transfers if your savings account allows that. Some accounts even enable you to automatically round up purchases to the nearest dollar and save the change, so you can grow your emergency fund without altering your lifestyle too much.

You may be able to progress more quickly if you have windfalls, like a raise or a tax refund, that you can save. But otherwise, just continue making a monthly contribution until you reach your goal. Then, you can decide if you want to save even more in your emergency fund or allocate your extra cash to something else.

Don't tap your emergency fund for non-emergencies. A one-time, upcoming expense is something you can plan for. Save for this outside of your emergency fund. Only call upon your emergency fund for expenses that are completely out of the blue, like an insurance deductible or an appliance breakdown.

When you need to tap your emergency fund, be sure to replenish it as quickly as possible. And schedule some time to review your emergency savings at least once per year. You'll probably want to set aside a little more over time as inflation drives up costs. But you may want to make bigger changes following major life events, like getting married or the birth of a child.

Emergencies are stressful enough without worrying about how you're going to pay for them. Hopefully, your emergency fund can stay in your savings account for a long time. But if not, you'll be glad you took the time to prepare.