What is an emergency fund and how big should it be?

An emergency fund is a savings reserve set aside to cover unexpected expenses or financial emergencies, such as job loss, medical bills, urgent home repairs, or car troubles. Its primary purpose is to provide a financial safety net that helps you avoid debt or financial stress when unforeseen costs arise. As for how big your emergency fund should be, a common recommendation is to save enough to cover three to six months’ worth of essential living expenses. This includes rent or mortgage payments, utilities, groceries, transportation, insurance, and any debt obligations. The exact amount depends on your personal circumstances, such as job stability, income sources, family size, and monthly expenses. For example, if your essential monthly expenses total $3,000, then a fully funded emergency fund would range from $9,000 (3 months) to $18,000 (6 months). If your job is less stable or your income fluctuates (like freelancers or commission-based workers), aiming for six months or more can provide greater security. Conversely, if you have multiple income streams, strong job security, or easy access to credit, a smaller fund of three months might suffice. Ultimately, the goal is to create a cushion that lets you manage unexpected financial shocks without having to rely on high-interest debt or disrupt your long-term financial goals.