About a quarter of Americans have no emergency savings, and this is one group you really don’t want to join. Instead, you should have enough of a rainy-day fund to survive hardships without financial stress or high-interest loans.
While maintaining an emergency fund is important, don’t over-contribute to this account at the expense of your other financial goals. Instead, take the time to calculate your ideal emergency savings so you can invest excess money more effectively.
Conventional Wisdom for Emergency Savings
A common guideline for an emergency fund is to save three to six months of living expenses. Generally, three months is the recommendation for a two-income household, where the loss of one salary would be difficult but not catastrophic. Six months is a safer bet for a one-income household, where unemployment results in a total loss of income.
This guideline is a good starting point, but emergency planning isn’t a one-size-fits-all solution. Your ideal emergency fund balance will depend on your unique financial situation and the hardships that could reasonably occur in your own life.
Preparing For Common Financial Emergencies
To tailor your emergency fund to your situation, you’ll need to consider the circumstances that might require you to need the funds. A good starting point is to review the most common financial shocks that people experience – medical issues, unemployment, and car problems.
Medical Expenses
When planning your emergency fund, take potential healthcare costs into consideration. It’s no secret that healthcare-related hardships affect almost 30% of people per year – the most common financial shock. The impact of these expenses can vary widely based on your individual health concerns and your insurance coverage.
For starters, you should at least have enough savings to cover your deductible, but the safer bet is to save your entire out-of-pocket maximum. If you are at risk for a chronic illness or have a family history of a particularly expensive disease, you may need to further increase your emergency fund to prepare for treatment costs.
An emergency fund is generally a good choice to save for medical expenses, but if you have a high-deductible health insurance plan, then you have another option. You can choose to contribute to a Health Savings Account, which provides tax advantages for the money you set aside for medical expenses. Contributions to this type of plan can serve the same function as emergency savings for healthcare, so you would typically want to avoid contributing to both plans for the same potential expenses.
Job Loss
Unemployment is the second most common financial hardship, impacting about 20% of people per year. The median duration of unemployment was 9.8 weeks in August 2025, meaning an emergency fund containing 3-months of expenses was enough for most people to find replacement employment. However, over a quarter of unemployed people were without work for over six months, and a standard, 3-month emergency fund wouldn’t have been enough.
If you work in a field with many different companies who are usually hiring, a 3-month emergency fund might be enough for you. On the other hand, if you work in a highly specialized job or a niche industry, you may need a more robust emergency fund that can cover a job search of 6 months or longer.
Car Problems
Car issues are the third most common financial crisis, and about 14% of people experience this shock each year. A reliable vehicle is essential for many people, as it provides transportation to and from work. For this reason, car trouble can constitute a significant financial emergency that justifies dipping into your savings.
The cost of repairing a car varies widely depending on the issue, but common repairs often cost more than $1,000. If you have an older car, one that is likely to need repairs, or a specialty vehicle with expensive parts, you may benefit from adding to your emergency fund in anticipation of auto expenses.
Emergency Fund Considerations for the Self-Employed
If you own a business or are self-employed, your income is likely far more volatile than a traditional employee. Therefore, your ideal emergency savings should be about twice as high as the general guidance.
An emergency fund of 6 to 12 months’ expenses can help you survive the loss of income associated with losing a client, seasonal changes in sales, or an economic downturn. However, the specific amount you need as a cushion will vary depending on the nature of your business and your personal financial situation.
The Downside of Having Too Much in an Emergency Fund
Once you’ve set aside enough money to cover emergency expenses, you need to consider what to do with the rest of your free cash. It may be tempting to keep contributing to your emergency fund, but that is often an unwise decision for your overall financial plan.
Most people choose a savings or money market deposit account for their rainy-day fund, because these accounts are easy to access and they come with a government guarantee that your cash is safe from bank failure. However, the average yield for these accounts is just 0.4% for savings and 0.59% for money market deposit accounts, as of September 2025.
Excess in your emergency fund represents cash that you could invest in other securities, like stocks and bonds. Over time, these investments have historically helped investors grow their portfolios through the power of compound returns. In fact, the S&P 500 yielded over 13% in the first three quarters of 2025. This means you could have earned significantly more by investing in these stocks compared to a bank account.
To decide the right amount to devote to an emergency fund, you’ll need to consider potential hardships, your risk tolerance, and the opportunity cost of investing in a low-yield account. Fortunately, you can rely on an experienced financial advisor to guide you through the decision process and determine how to invest your excess cash.
Discuss Your Financial Situation with an Advisor at DreamWork
At DreamWork Financial Group, our experienced advisors can help you determine the amount to save in an emergency fund based on an analysis of your personal situation. We can also help you determine how to reach your emergency fund goal while balancing retirement planning and other investments.
Our proprietary wealth management program, Investing Gameplan™, is designed to help you reach your unique financial goals. It includes a completely custom portfolio of individual stocks and low-cost ETFs created by your personal portfolio manager to match your needs. In the past, this level of personalization was reserved for the very wealthy, but with DreamWork You Don’t Have to Be Wealthy to Have Wealth Management®.
To learn more or discuss your personal financial situation, contact us today.