Financial advisors have long recommended keeping three to six months’ worth of living costs in an emergency stash.
Then the pandemic changed everything.
As millions lost employment and exhausted their reserves, some money experts began rethinking the traditional emergency fund advice. Suze Orman suggested that people with steady jobs should aim for 12 months of living expenses. Tina Hay, founder of Napkin Finance, said during a live Q&A with Savinly that the pandemic revealed the need for roughly a year’s worth of savings for true financial protection.
For many who struggle to save even a three-month cushion, socking away a full year’s expenses might seem out of reach. This article will help you decide whether a 12-month emergency fund should be your target, how to pursue that goal and how to build those savings. (Hint: high-yield savings options, like SoFi Checking and Savings and Vio Cornerstone Money Market Savings, make this easier.)
The Advantages and Drawbacks of a 12-Month Emergency Fund
Per the U.S. Bureau of Labor Statistics, the average spell of unemployment in April 2024 was roughly 20 weeks — so having only the minimum three months saved wouldn’t cover much of that gap.
And those figures can shift. In June 2021, for example, the average stretched to just over 31 weeks.
Targeting a larger emergency reserve, such as a 12-month fund, offers increased reassurance that you won’t be pushed into financial hardship if you’re without income for a prolonged period.
Think about your own circumstances. If you work in an industry where new roles aren’t readily available, you may want more than six months’ worth of expenses tucked away. If your household depends on a single paycheck, saving a year’s worth of expenses can act like the safety net of a second income.
Extra savings also reduce the chance you’ll need to borrow or fall behind on bills if you encounter a health crisis or another costly emergency.
That said, keeping 12 months of expenses in cash isn’t the best fit for everyone — and it may not be practical.
Reaching that target can take a long time. Concentrating on it might also divert resources from other financial priorities, such as paying down high-interest debt or contributing to retirement.
If you’re only making minimum payments on credit cards with steep interest, you’ll barely chip away at the balances. Delaying retirement contributions costs you potential compound growth over the long term.
Is a 12-Month Emergency Fund Appropriate for You?
If you want extra protection against a future financial shock, aiming for a 12-month emergency fund can deliver that sense of security.
But if you’re living paycheck-to-paycheck, carry heavy debt loads or haven’t begun saving for retirement, concentrating exclusively on a year-long emergency fund probably isn’t the smartest immediate move.
Other factors matter too. Strong health, auto and homeowners/renters insurance with low deductibles can ease the pressure to hold massive cash reserves. Having a reliable friend to crash with if you can’t pay rent can reduce the urgency of saving that much. If you possess assets you could quickly liquidate, you may not need as large a cash cushion.
How to Accumulate 12 Months of Living Costs
If a 12-month emergency fund is a priority for you, it’s doable — but it will likely take time and patience.
Begin by determining your precise savings target. Don’t simply use your annual salary as the benchmark. Your 12-month emergency goal should equal the essential living expenses you must cover during that period.
Create or identify a bare-bones monthly budget to isolate your indispensable costs — the things you cannot forgo. Multiply that stripped-down monthly figure by 12 to find your overall goal.
If you already have some emergency savings, subtract that sum from your target so you know how much remains to be saved.
Next, review your typical monthly budget (not the bare-bones version) and decide how much you can comfortably set aside each month without making life miserable. Cutting out every discretionary expense makes the process unbearable and unsustainable.
Keep in mind you’ll also need to balance this with other financial responsibilities.
While you analyze your spending, seek places to trim. Do you pay for subscriptions you rarely use? Can you reduce grocery costs? Is your phone plan more than you need? Calling service providers to negotiate lower rates won’t always work, but it’s often worth trying.
Once you know a realistic monthly savings amount, arrange automatic transfers to your savings account to make contributions consistent and effortless.
Extra Ways to Boost Your Savings
After trimming expenses, consider ways to earn additional money dedicated to your 12-month emergency fund. Can you sell unused belongings online? Pick up freelance gigs or a part-time side job? When did you last discuss a raise with your boss? Sometimes changing employers is the quickest path to a meaningful salary increase.
Deposit all extra income — including windfalls like tax refunds — into your emergency account. Be sure the money sits in a high-yield savings vehicle so it earns more interest; see resources on a minimum emergency fund, emergency funds strategies and how to start emergency fund for additional guidance.
It may take several years or longer to amass a full 12-month emergency fund. It’s not a quick win, but with steady contributions and a commitment to withdraw only for genuine emergencies, you can reach that safety net.
Jamie Parker is a former senior writer at Savinly.
