How to Save a 12-Month Emergency Fund From Scratch

stash of money in a chest
Getty Images

The conventional advice for how much money you should have saved in your emergency fund used to be three to six months worth of living expenses.

Then the coronavirus pandemic hit.

As millions of people lost their jobs and blew through their savings, some financial experts began to question the old emergency fund recommendations. Suze Orman said people with stable jobs should be working to save 12 months of living expenses. Napkin Finance founder Tina Hay, in a live Q&A with The Penny Hoarder, said the pandemic has shown that people really need to have a year’s worth of savings for emergencies.

With many struggling to save up three to six months of expenses, saving a year’s worth can seem nearly impossible. Should a 12-month emergency fund really be the goal, and how do you even reach that benchmark?

The Pros and Cons of a 12-Month Emergency Fund

According to the U.S. Bureau of Labor Statistics, the average duration of unemployment as of June 2021 was just over 31 weeks — meaning three to six months of savings wouldn’t be enough if you were relying on that alone to get by.

A bigger emergency savings goal — like a 12-month emergency fund — allows for greater peace of mind that you won’t be in financial distress should you find yourself without income for an extended period of time.

Consider your individual situation. If you work in a field where it’s difficult to quickly find new opportunities, you might want to have more than six months of expenses saved up. If you rely on only one source of income, having a year’s worth of living expenses saved up can mimic the financial safety net of a second income.

Having extra savings can also help you avoid going into debt or falling behind on bills should you face a medical emergency or another major expense.

Of course, stashing 12 months of expenses in an emergency fund may not be beneficial — or realistic — to everyone.

It can take quite some time to reach this savings goal, and working toward it could detract from other financial priorities, like paying down debt or saving for retirement.

If you’re only paying the minimum balance on high-interest credit card debt, you’ll barely make a dent in the balance. Putting off retirement contributions means you’ll miss out on the chance to let compound interest grow your money.

Is a 12-Month Emergency Fund Right For Me?

If you’re looking for additional security to weather a future financial crisis, having a 12-month emergency fund can help provide that.

Saving up a year’s worth of expenses is a wise choice if the thought of only having enough money to stretch six months makes you uneasy. The fact is that the three- to six-month emergency fund guideline is only a recommendation, not a hard-set rule.

However, if you’re living paycheck to paycheck, have significant debt or haven’t begun saving toward retirement, focusing on a 12-month emergency fund probably isn’t the best move right now.

There may be other reasons. Having stellar health, auto and home/renters insurance with low deductibles can give you the peace of mind that you’ll be able to financially handle any emergency. Knowing you can crash with a friend if you couldn’t pay rent may take away some of the pressure of needing to save up as much. If you have assets you could easily liquidate, you may not need to have as much cash on hand.

How to Save Up 12 Months of Living Expenses

If a 12-month emergency fund is a financial goal you’d like to work toward, it may take some time, but it certainly is achievable.

First, you’ll want to calculate what your actual savings goal is. You’re not simply taking your annual salary and making that your goal. Your 12-month emergency fund total should be just enough to cover your absolutely essential living expenses during that time frame.

Savings Calculator

A valid starting balance is required.
Starting balance must be less than $2,147,483,647

A valid monthly contribution is required.
Monthly contribution must be less than $2,147,483,647

Invalid time.

A valid annual interest rate is required.
Interest rate must be less than or equal to 400%.
Final balance:

If you haven’t come up with a bare-bones budget, take the time to do so now. This will show you your essential monthly costs — stripping away all the things you could do without. Multiplying your monthly bare-bones expenses by 12 will give you your target savings goal.

If you currently have money in emergency savings, subtract that amount from your goal. Then you’ll know how much you still need to save up.

Next, you need to look at your regular monthly budget (not the bare-bones version) and figure out how much you can realistically put aside each month without living like a miser. Cutting out all fun money spending will only make it excruciating to reach your goal.

Also remember, you’ll need to balance this with any other financial priorities you have.

While you’re examining your budget, look for areas where you can make cuts. Do you have subscription services you don’t use? Can you save money on groceries? Are you overpaying for cell phone service? Negotiating with service providers isn’t successful 100% of the time, but it doesn’t hurt to ask.

Once you calculate how much you can comfortably save each month, set up automatic transfers to your savings account to make the process effortless.

After checking for where you can save, take time to brainstorm how you can earn extra money to go toward your 12-month emergency fund. Do you have items around the house you can sell online? Can you take on a side gig or part-time job? When’s the last time you talked to your manager about a raise? Sometimes securing new employment is the best way to get a significant salary bump.

Put all that extra cash — plus any windfalls like a tax refund — into your savings account. Make sure your emergency savings are in a high-yield savings account so you’ll earn more interest.

It could take a couple years or more to build that 12-month emergency fund. This isn’t an easy short-term goal, but if you stay consistent in your efforts and only make withdrawals if a true emergency occurs, you’ll get there.

Nicole Dow is a senior writer at The Penny Hoarder.