The 3-6-9 Guideline for Emergency Savings

Julia Chang

3 jars filled with different levels of changeWe know it’s a message you’ve heard many times before, but it’s worth repeating: Maintaining an emergency savings fund is one of the pillars of a healthy money life.

Why? Think of it like the fire extinguisher you keep in your house; ideally, you’ll never need to use it—but when you actually have to, you’re so glad it’s there. The same goes with an emergency fund. Sure, you could use that money on a weekend beach getaway. But when the basement floods during a freak rainstorm, that rainy day fund can become a financial life saver.

The one thing that might, however, feel stressful about building an emergency fund is feeling like yours is never sufficiently stocked. How can you really be sure you have enough? There’s no one-size-fits-all answer to that—but there are some rules we at LearnVest think you should consider to help you feel less worried and more confident that you’re maintaining a cushion commensurate with your lifestyle and household responsibilities.

If You Don’t Have Emergency Savings at All

Before we get started, however, first things first: If your answer to “How much is in your emergency fund?” is “What emergency fund?” then we recommend getting started, stat. Consider saving whatever amount you can now—whether it’s $100, $50, or even $25 a month—until you have at least one month of take-home pay stashed away.

This should happen before you accelerate any other financial goals, like paying more than the minimum owed on your credit cards, fast-tracking your student loan repayment or saving for the down payment on your future dream home. Why? Because if a financial emergency strikes, having even a small cushion could help lessen the chances that you’ll turn to your credit card—and add to debt you may be diligently trying to pay off.

Got at least a month of take-home pay in your emergency savings account? Good. Now you can focus on growing it even further (while tackling other goals, too). Here are some benchmarks that can help you determine if you’re making good progress—or if you need to be more prepared for that rainy day.

RELATED: I’m Glad I Had an Emergency Fund: 4 Real Tales of Life Gone Wrong

When 3 Months of Take-Home Pay May Be Enough

Are you a proud renter, have only your mouth to feed, have a steady paycheck and could always move back into your childhood bedroom if necessary? Then having three months’ worth of take-home pay in an emergency fund may be sufficient.

Essentially, not bearing the responsibility of a mortgage or minor children makes having an emergency fund of more than three months a nice thing to have—but not necessarily a must-have. Another big factor that weighs into this is whether you have a reliable “safety net:” i.e., relatives or close friends who would gladly take you in or help you out if you were really in dire straits.

If all this describes your situation, once you hit the three-month mark, you can feel comfortable directing more of the money you would be putting into emergency savings toward your other big financial goals, like paying down debt or saving more for retirement.

When 6 Months of Take-Home Pay May Be Enough

This is the emergency-fund rule you may have heard most often and, indeed, it is the one that is likely to apply to the largest group of people.

Married with kids, own your home in the ‘burbs and have two steady paychecks coming in? Consider building up to an emergency fund equivalent to six months of the take-home pay of the highest earner in your household.

Married with no kids but still have a mortgage to pay? The same guideline applies. Married single-income renters with a toddler? Ditto. Single with a condo? We think you know the answer.

Basically, if you own your home or have kids under the age of 18 or have no aforementioned safety net to speak of (or any combination of these factors), six months is a good benchmark to aim for. When in doubt, think six.

RELATED: Money Mic: How a $12K Emergency Fund Saved Me When I Got a Pink Slip

When 9 Months of Take-Home Pay May Be Needed

OK—now that we’ve got the number six etched in your brain, there are some instances when you may need more than that in your emergency fund—and that largely has to do with whether or not you’ve got a steady paycheck.

If you (or your spouse) are self-employed or are a full-time freelancer, chances are higher that your income is less predictable. One month, you could be juggling 10 deadlines and working 60-hour workweeks. The next month could be spent waiting around for business to come through—and let’s not even get started on the fact that your clients may be a bit pokey when it comes to cutting checks for you.

In a nutshell, the more unpredictable your income, the more you could find yourself thrown off by a chipped tooth or fender bender. So having an emergency fund padded with nine months of the highest earner’s net income may help give you a bit more peace of mind that you could weather a financial storm. (Just note that how much you’re socking away each month toward emergency savings should be looked at holistically, within the context of your big-picture money goals—a decision you may want to make with the help of a financial planner, no matter your situation.)

It bears repeating that the 3-6-9 guideline is merely that—a guideline to help you assess whether the size of your emergency fund can help you sleep a little better at night. We do, however, encourage you to try to meet the benchmark that most closely applies to your situation—because when it comes to an emergency fund, less really isn’t more.

RELATED: Fearlessly Freelance: 6 Expert Tips From People Who Successfully Took the Plunge

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.

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  • flours

    While you’d always rather leave money in a retirement plan, the money you put into a Roth IRA could also be used for an emergency while you build your liquid savings…I hate the thought of someone putting off saving for retirement to build an emergency fund when a Roth could serve both purposes. I felt that using my Roth was a better prospect than going further into Credit Card debt. I’m thankful I never had to use it while I got out of debt and built my 3-month safety net, but it was there just in case and now grows towards my future.

    • Brian Peek

      If I use my Roth IRA as my emergency fund and I am out of work for 6 months, are there charges or fees incurred for taking money out of your Roth IRA?

      • flours

        I wanted someone more educated to me to back up my understanding, so I found this information at Charles Schwab…but it reads as I understand it…the contributions you make (& only the contributions) can be taken out any time at any age without penalty or tax. Earnings are an entirely different matter & can become very complicated based on how long the account has been open, the age of the account holder, & how the money is going to be used. Depending on where you keep your account, there may also be a transaction fee to make a withdrawal (I do not believe the company mine is at charges one, but I would certainly ask)

        • Leslie

          Hi, which company do you use?

          • flours

            Personally, I use Edward Jones to manage my investments outside of my 401k

      • rlgreen91

        There can be, depending on your age and how quickly you can replenish the IRA. While you typically want to let your money work for you, I’d personally keep about 2 months worth in a savings account so that you can withdraw quickly and without penalty.

      • flours

        Well, I tried to reply, but I guess my post wasn’t cleared because it had a URL in it…I found some information on Charles Schwab website that covered Roth withdrawals. The money you contribute can be removed at any time. Earnings however are an entirely different ballgame & can have fees and penalties depending on age of the account holder, how the money is being used and how old the account is. If you Google Roth IRA withdrawals, you should be able to find all the information you need. Of course, a qualified financial adviser could tell you as well. There also could be a fee imposed by the company that holds your account, it depends on which company, so I would investigate that as well.

  • Ann Keys

    Your emergency fund should never be in the form of a Roth IRA it should be in a regular savings account. An emergency fund is like insurance treat it as such.

    • Rachel

      You say “never” but don’t explain why. I’d be interested to hear why you think that. I keep ~2 months of expenses in cash but I keep the rest in cash holdings in my IRA. There are no fees or penalties for withdrawing my contributions, should I need to, but if I never need to, it’s in my tax-advantaged account.

      • flours

        I’m with you Rachel – if I can get my money to work for me, all the better. In a perfect world we’d all make enough money to fully fund every goal we have from the beginning, but that isn’t reality. When I started building my savings after a divorce, I put half of what I could save every month into my Roth & half into my savings account…When I hit one month’s income of liquid savings, I changed to putting all of my savings into my Roth until I was able to max it out…it’s a balancing act to be certain.

        • Sheila

          I truly think this advice about holding ER funds in cash or liquid savings goes back to when it was hard to get access to money quickly or have credit cards. The argument that I should hold 6 mos of savings in a savings account earning no interest indefinitely never made any sense to me. I have 2 mos of cash but other means of accessing $$ in a true emergency where you need the funds within 24 hours (which I can’t think of any other than ransom!). I think nowadays there are so many other ways to access money fast that you can use until you get access to other savings which may be in Roth, investment accounts etc… As for selling at a loss, you are either using cash which made you no money for years or selling funds at a loss which probably made you money so in my opinion it evens out.

      • Ann Keys

        It’s an accessibility and risk issue for me that I am not willing to take. I have a Roth IRA but its for retirement and I wont touch it. I also have an emergency fund that is accessible immediately, I don’t have to wait to sell stocks and risks selling when they are low and I don’t have to wait 3 days to a week to get it the funds. In a savings account it’s there immediately. Furthermore your future contributions will still be subjected to the normal contribution limits. But if it works for you all keep at :)

    • ana

      I wouldn’t put my e-fund into my ROTH. I put my down payment money for my first home in my ROTH and it was a nightmare trying to get it out without penalty even though that’s one of the qualified reasons you can take the money out. The people at the bank didn’t understand all the rules and how to do it. If you could take your e-fund out quickly and without penalty it might be ok but I’ll stick to keeping my e-fund in my savings account earning .95% interest. I know it’s accessible if I need it.