How Much Emergency Fund Should I Have?

2020 was a wild ride, teaching us that emergencies are like unexpected guests – they show up uninvited and can mess with more than just your health. Take the COVID-19 saga, for example; it threw the entire world into a loop. With a virus that spreads like wildfire and no magic vaccine, there’s a serious risk of catching it.

Now, some folks might have superhero immunity, but for those not so lucky, getting hit by the virus means dealing with a whole bunch of expenses – quarantine, hospital stays, treatments, meds, and even the aftercare, all tangled up with the rising cost of medical stuff. And if your wallet isn’t ready for that kind of party, it could mean kissing your life savings goodbye. That’s where having an emergency fund swoops in to save the day. But here’s the catch – how much should you stash away for that rainy day? We’ll figure out that answer in this blog.

First off, think about the must-haves – the basics that keep your life on track:

  • Keeping a roof over your head. (a.k.a. Housing)
  • Putting food on the table.
  • Covering health expenses (including the insurance safety net).
  • Handling utility bills.
  • Getting from A to B (Transportation)
  • Taking care of personal needs.
  • Managing any debts hanging over your head.

What is an Emergency Fund?

An emergency fund acts as a financial safety net reserved specifically for sudden expenses or financial crises. This fund can be tapped into for various unforeseen costs, whether it’s a substantial car repair, home maintenance, medical bills, or coping with a reduction in income.

In essence, emergency savings come in handy for handling unexpected bills or payments, whether they are significant or minor, and fall outside your regular monthly expenses.

How Much Emergency Fund Should I Have?

Think about it like this: your emergency fund should cover 3 to 6 months’ worth of your expenses. So, if you bring in ₹40,000 monthly and spend ₹25,000 on regular stuff, your emergency fund should be around ₹75,000 to ₹1,50,000.

Now, you can split this fund into two parts.

First, there’s the part for big emergencies that don’t happen a lot, like a major disaster or sudden health issues. Put this part in investments that give a bit more interest, even though it might take a bit to get the money when you need it.

Then, there’s the part for immediate needs in emergencies. This won’t give much interest, but you can get to the money right away. It’s like a quick fix for extreme situations until you can access the money in the other part of your fund.

How to Calculate How Much to Put in Your Emergency Fund?

To figure out your emergency fund, tally up your monthly essentials like rent, food, clothing, school fees, EMIs, and miscellaneous expenses. Multiply this sum by six to ensure you’ve got a solid financial cushion for unforeseen circumstances.

Simple equation: (Monthly expenses) x 6 = Emergency Fund

How to Build an Emergency Fund?

We have a whole guide on how to create an emergency fund which you can refer to start your journey. Since emergency funds are best kept in low-risk investments, you have a few options to pick from – like putting it in your savings account, going for a fixed deposit (FD), recurring deposit (RD) or choosing safe investments like debt mutual funds such as an ultra-short-duration fund or liquid funds.

Tips to Help You Manage Your Emergency Fund

Make your savings journey easier by setting smaller goals instead of one big one.

Start off on the right foot by aiming for a smaller target initially. Instead of immediately going for three months’ worth of expenses, go for one month or even just two weeks. Choose a goal that feels achievable right from the beginning.

Achieving that first goal can boost your confidence and keep you motivated. Then, set your next goal a bit higher, and the one after even higher. As saving becomes a habit, the positive momentum from hitting these smaller targets will push you toward bigger ones.

Consider Using a Savings Account or Money Market Account

Think about using a simple savings or money market account, preferably one connected to your checking account. You want your money to be accessible within a day but not instantly available. The goal is to keep it safe and easy to access, avoiding investments in stocks or bonds that come with market risks.

Unlock the power of high interest! Open your Freo Digital Savings Account today and supercharge your savings. Watch your funds grow with the best interest rates in town. Start now for a wealthier tomorrow!

Look for an Account that Pays You Back

When choosing an account, look for one that gives you something back. Some savings options provide a small annual yield. Be aware that some might have minimum deposit or balance requirements, so it’s wise to compare different options and check for any annual fees.

Save Enough to Cover Three to Six Months of Expenses

The amount you should keep in the account for your emergency fund depends on your personal situation, like having dependents, a working spouse, or financial support from your parents. For instance, if you’re the sole breadwinner with a family, you might consider saving up to eight months’ worth for emergencies. Also, don’t forget about health and disability insurance.

Only Dip Into This Account for Genuine Emergencies

These could be situations like your car breaking down, losing your job, dealing with a leaking roof, or facing a hefty medical bill. Remember to put back the money you take out. Unexpected expenses often come more than once.

Avoid Increasing Your Monthly Spending or Opening New Credit Cards

Once you’ve made saving a habit, be cautious not to let spending increase and negate your progress. For instance, if you stopped buying new shoes every month to save money, don’t replace that with a new monthly shopping habit. It defeats the purpose of saving!

If you find, you still have an extra $50 each month, maybe your savings amount is too low. On the other hand, if you don’t have that extra $50, you might be relying on credit cards. Neither situation is helpful. While building your emergency fund, it’s okay to enjoy life, but don’t forget the importance of saving.

Having a solid emergency fund is crucial for your financial well-being. Be practical, but work towards reaching your savings goal as quickly as possible. Achieving that goal might even make life more enjoyable in the long run.

Don’t Oversave

To be more precise, avoid allocating an overly substantial portion of your savings to the emergency fund. This fund primarily consists of readily accessible cash, typically housed in a low-yield option such as a savings account with minimal interest.

Once you’ve reached your designated emergency fund target, it is prudent to cease additional contributions to that account. Instead, redirect your deposits to an account that allows your money to grow independently. A favourable option is channelling funds into your retirement accounts, as they capitalize on time to generate optimal returns.

How to Save for an Emergency Fund When Money is Tight?

If you’re facing financial constraints, saving for emergencies might seem challenging. Rather than fixating on the final savings amount, decide on a percentage of your take-home pay that you can comfortably set aside. Whether it’s 1% or 2%, the key is to consistently save a predetermined amount each payday without dipping into it. Over time, these regular contributions will accumulate.

Example of an Emergency Fund

Imagine a married couple in India, managing a monthly budget of ₹50,000 for things like rent, groceries, and transportation. If they follow the three-month rule for emergency funds, they should save at least ₹1,50,000. For a more solid safety net, they could aim for ₹3,00,000 for six months or ₹4,00,000 for eight months to handle unexpected money troubles.

Where Should I Keep My Emergency Fund?

To safeguard your emergency funds with minimal risk, consider a range of secure investment instruments. These options include traditional savings accounts, recurring deposits (RDs), fixed deposits (FDs), as well as debt mutual funds like ultra short-duration funds and liquid funds.

Shield your finances and let your money blossom! Kickstart your emergency fund with Freo RD or FD. Grow your wealth while ensuring you’re prepared for whatever comes your way. Invest in your financial well-being now!

When to Use Your Emergency Fund?

Create some rules for yourself about what counts as an emergency or unexpected expense. Not every surprise cost is a major emergency, but try to be consistent. It might not always be a visit to the emergency room; it could be a medical bill not covered by insurance.

Having a savings fund for financial surprises helps you avoid relying on credit cards or loans that can lead to debt. If you use a credit card or take a loan for these costs, your one-time emergency expense might end up much higher because of interest and fees.

But, don’t hesitate to use your savings if you really need it. If you use up what’s in your emergency savings, just focus on building it up again. Getting better at saving over time will make this process easier.

Freo Could be Your Go-to Spot for Stashing Away That Emergency Fund

When it comes to parking your emergency fund, the key is having it handy when life throws you a curveball and making sure it grows a bit in the background. That’s where Freo’s digital savings account steps in. It gives you the flexibility to get to your cash when you need it (hello, liquidity!), all while earning more interest compared to your regular savings account. It’s like having the best of both worlds for your emergency fund game.


  1. What makes a solid emergency fund?

    Experts generally say it’s smart to keep aside enough money in your emergency fund to cover your living expenses for about 3 to 6 months.

  2. What is the formula for an emergency fund?

    To figure out the right amount for your fund, just add up all your monthly bills—like rent, utilities, groceries, and such. Then, decide how many months you want to be covered and multiply that by your total monthly expenses. Simple as that!

  3. Is a 12-month emergency fund too much?

    Typically, they say saving for three months of your must-pay bills is enough. Yet, some money gurus think going for a 12-month emergency fund isn’t overdoing it, especially considering the crazy times we’ve been through, like the whole pandemic situation.

Don’t wait for an emergency to strike! Be financially prepared by storing your emergency fund in a high-interest digital savings account by Freo.

Open yours today!