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Americans are notoriously bad at saving money. As of 2018, an estimated 40% didn't have enough funds in the bank to cover a $400 emergency. And you can bet that $400 in savings won't nearly cut it if your roof springs a leak, or if you need emergency medical treatment. But how much money should you keep in a savings account? It depends on your personal circumstances.
The standard emergency fund
Since you never know what unplanned expenses life has in store for you, a general rule of thumb is to build an emergency fund with enough money to cover three to six months' worth of "essential expenses," which include your rent or mortgage payment, car payments, utility bills, healthcare, and food. That figure doesn't need to include expenses like travel, restaurant meals, and cable -- costs you have the option to cut should the financial need arise.
Whether you should aim for the low end of that range (three months) or the high end (six months) depends partly on the types of unplanned bills you might incur. If you don't own a home, you can't get stuck with a major repair bill. If you don't own a car, you don't have to worry about a catastrophic breakdown. And if you don't have kids, you don't have to worry that they'll get sick and cost you a fortune in medical bills. In that case, you might save up three months' worth of essential living expenses and call it a day.
On the other hand, if you have health issues that increase your risk of landing in the hospital, or an aging home that seems to surprise you with a new issue every year, then socking away six months of living expenses makes more sense. The same holds true if you're the sole breadwinner in your household and have several dependents who count on you for income.
Let's not forget the role your job should play in determining your savings level. The money in your emergency fund can tide you over during a period of unemployment. If you have a stable job in a booming industry, then you might not need six months to find work in the event you're let go, and therefore you may settle on three months' worth of living expenses in savings. If your job is less secure, and finding a position comparable to the one you have now will be challenging, then you'll be better served by a six-month savings cushion.
Why you might need even more cash reserves
Though three to six months of living expenses is the standard for savings, there are some scenarios where you may want to aim higher. If you're self-employed and your income is variable, for instance, it pays to have a little extra cash in the bank to buy yourself breathing room during slower periods at work.