Certain financial experts suggest you start bettering your financial life with saving up $1,000, and while that is a good start, most people have expenses far beyond $1,000. But is $1,000 enough for an emergency fund?
While a starter emergency fund of $1,000 can help many people get started, it’s important to consider whether or not $1,000 is enough for an emergency fund.
Why do you need an emergency fund?
Why exactly do you need to keep money in savings for an emergency? Generally when things are going well and income is flowing in most people do not prioritize an emergency fund (myself included!). However, ignoring an emergency fund only ends up hurting you when you finally encounter an emergency.
An emergency fund is absolutely critical for anyone who wants to be prepared for handling the ups and downs of life. Life is filled with unplanned events and an emergency fund allows you to walk through things that pop up with lots of peace.
What type of events might be considered an emergency? These are things that come up during a month that you weren’t expecting but are a normal part of life. That includes many things like the following that run close to over over $1,000.
- Emergency: a dental office visit that ends up costing hundreds up dollars or even up to $1,200 or more for an emergency
- Emergency: flat tires where you end up needing to replace 1 or even 4 tires that can costs from $400 – $1,000
- Emergency: medical event where you have to visit the ER which could cost $500 with your deductible and more for ambulance services or follow up appointments
There are a number of different types of emergencies but many of them cost hundreds of dollars that you likely don’t have included in your current budget. Having one of these expenses pop up could destroy your budget and send you into debt if you do not have an emergency fund.
If you can’t pay for the emergency expense with your income during the month then you might turn to credit cards or borrowing from friends and family. Either situation increases debt and makes your life harder in the long run. Being able to cover an emergency expense with your emergency fund makes things easier and less stressful.
An unfortunate fact of life is that “emergencies” do happen and they will happen to you. That is why having an emergency fund is something you must do if you want to maintain your quality of life and go through life without being stressed by each new emergency.
How Would You Pay For $1,000 Emergency Expense?
Let’s start at the beginning… Can you afford an emergency expense that is $1,000? As I shared before, many common emergency expenses can be $1,000 or even more. Sadly according to many studies and polls, almost half of American can afford a $1,000 emergency expense but unfortunately that means half can’t cover that unexpected bill.
Most people who responded to the poll linked above would pay for a $1,000 expense like a cap repair by dipping into savings like an emergency fund.
Others responded to say they would pay for an emergency expense by using a credit card, taking out a personal loan, or asking family for help to cover the unexpected expense.
The Federal Reserve has backed up this type of response with survey results that said 61% of Americans said they would pay for an unexpected $400 expense with cash, savings or a credit card. In their poll only 12% said they would not be able to cover it.
Between savings, credit, and help from family most people at least have an idea of how they would want to cover an unexpected expense.
Is $1,000 Enough For An Emergency Fund?
In most cases, $1,000 is not enough for an emergency for most people.
On average a general emergency for people is more than $1,000 and Bankrate found that the average unexpected expense for survey respondents was about $3,500.
So what happens when you’ve only saved up $1,000 for emergencies and then you encounter the typical $3,500 emergency? Unfortunately that means you have $2,500 you need to find a way to pay for and many people then turn toward credit cards or worse, payday loans. Those options can be a very high cost solution since the average credit card rate is 17%.
One thing to remember when thinking about emergencies: they will eventually happen. In any given year probably a quarter or the people you know will need to find a way to pay for a financial emergency.
So if we know emergencies will happen, those emergencies on average are $3,500, and any given year it might be us that has an emergency, what do we do with this information? We plan to save more than $1,000 in an emergency fund so that we will not have to turn toward high cost solutions to cover emergency expenses.
When $1,000 Isn’t Enough
You might want to know some specific situations where $1,000 is enough for you and when it is not.
When $1,000 is enough for your emergency fund:
- you are a student and live with family and have very limited expenses
- you have a very stable income that is guaranteed and multiple sources of that income
In some cases where you have very low or no expenses or if you have multiple sources of guaranteed income then you may be able to get by with just $1,000 in savings.
When $1,000 is not enough for your emergency fund:
- if you have children and are the sole provider for them
- if you own a home and need to cover any unexpected repairs
- if you are self-employed or have commission based inconsistent income
- if you work in an industry prone to layoff
- if you have chronic health problems and will likely have medical expenses
- if you have multiple pets especially if older or unhealthy
As you can see, there are many life situations where there could be a need for more than $1,000 in an emergency fund. If you are more likely to encounter “unexpected” expenses regularly, then you should work to build a larger emergency fund.
How much should I have in my emergency fund?
Since we clearly know $1,000 is not enough for an adequate emergency fund, how much do you need to save?
This exact number of savings you need will vary from person to person and will depend on a few factors.
Your emergency fund will depend on:
- your monthly income
- your monthly expenses
- the stability of your income
- your risk tolerance
You will need to take into account all of those factors to determine how much you want to save up for your emergency fund.
Let’s say you earn $3,000 a month but your expenses per month are only $2,000. You have a stable job but you are a single person so if you lose your income you will not have a backup plan besides unemployment.
In this case you would want to save up 6 months of expenses, so 6 x $2,000, or $12,000 would be your emergency fund number.
If you have a spouse and you both work then you might air on the side of saving up just 3 months of expenses.
The more unstable your income is the more your will want to save up. If you are a business owner or work on commission then you might want to save up 6 months of expenses or even more in order to feel secure.
For us we both work so we decided to save up 3 months of expenses. That meant we needed 3 months of $3,000 in expenses, or $9,000. We plan to save up even more eventually but having $9,000 means we feel secure enough to weather most emergencies that come along.
You will have to look at all of the factors in your unique situation and then decide what makes the most sense for you and what gives you the most peace. Finding the peace of mind number for your situation will depend on both the numbers and how you feel about the numbers. Remember that this is a very personally choice and won’t necessarily match the numbers of other people who may have different factors involved!
Tips For Saving An Emergency Fund
Savings can be challenging when you are trying to juggle debt repayment, mortgages or high rents, and lower paying wages than previous generations. However, despite the circumstances we need to be more focused than ever because we know that $1,000 is not enough to cover emergencies.
If you have struggled to save in the past then saving for emergencies might be something you need to try multiple tactics to achieve. Here are a few ways people have found success in saving consistently to build an emergency fund:
- try a savings challenge
- save every $5 bill you get back from spending
- automate savings a certain amount every paycheck
- move unspent money in your budget over weekly
- track your emergency savings visually
- build up a side hustle to earn money to save faster
- find free activities so you can save more money
You can try one or more of these tactics in order to start saving and keep building your emergency fund savings accounts.
Where To Save Your Emergency Fund
Where should you save your emergency fund? What’s the best place to keep your savings?
I personally use and recommend an online savings account with a high interest rate. There are many online bank accounts you can open at placed like Capital One, Ally, or SoFi where you get a high interest on your savings with no fees.
Reasons I like these types of accounts for your emergency fund:
- You don’t have account minimums so you can start your emergency fund from the very beginning with just $1 or $5 or whatever you can spare. If you watch my Transfer Tuesday videos then you know $5 of consistent action adds up!
- They are easy to open and generally very user friendly. These banks are not complicated and they make the process very easy and also don’t charge fees that traditional banks may charge.
- Online only banks make it more inconvenient to withdraw the whole amount in your emergency fund which means you will be more likely to only use it in a real emergency.
- You can keep your savings account separate from your regular checking account. If you want you can open an account at one of these banks you don’t normally use so your money is safe and not immediately accessible to put into your checking account.
Online bank savings accounts are my personal favorite way to save but you can also save in any other savings account. Just make sure there is not a minimum balance requirement in case you need to use all the money and that there are no fees.
Most savings accounts, even the ones with the highest return will not give you much return for your money. That is totally ok because you are not looking to make this money “work for you” as an investment.
Your emergency fund is not meant to be an investment. It is meant to be an insurance policy so that it is there when you need it. You should not invest your emergency fund in the stock market since there is no guarantee the money will be there when you need it.
Remember that whether you are starting with $5 or $500, keep saving your money!
You may only be able to saving $5 a week but being consistent over time adds up and that consistency is more important than perfection!
Mary is the founder of Pennies Not Perfection where she shares her journey to build wealth through online income. She quit her day job in 2021 after she paid off her debt and doubled her 9-5 salary.
Mary's favorite free financial tool is Personal Capital. She uses their free tools to track net worth and work toward to financial freedom.