How much should one save for an emergency fund?

• A. One year of expenses.
• B. Ten years of expenses.
• C. One week of expenses.
• D. Up to three to six months of expenses.

Answer: (B)

The main idea is how much you should save to cover unexpected events without derailing your finances. A solid emergency fund is typically three to six months of your essential living expenses. This range gives you enough cushion if you lose a job, have a medical issue, or face a major, surprise cost, while avoiding tying up too much money that could be earning more elsewhere or being used for goals.

To figure out the amount, start by listing essential monthly costs—housing (rent or mortgage), utilities, groceries, transportation, minimum debt payments, and necessary insurance premiums. Don’t include non-essentials like dining out or entertainment. Add those up to get your monthly essentials, then multiply by three to six to set a target. The exact spot within that range depends on your situation: if you have a stable job and two incomes, three months might be enough, but if your job is less secure, you’re self-employed, or you have dependents, aiming closer to six months is wiser. For a concrete example, if essential monthly expenses are $3,000, you’d target $9,000 to $18,000.