I lost my first car, an Acura Integra, in an accident while making a dedicated left turn. A red Dodge Durango blew through her red light and totaled my little silver Integra.
Front quarter panel and passenger door were smashed in, the wheel was bent, the axle was bent, both air bags deployed, and my windshield and passenger window was cracked. The left turn lane had two lanes and I was just lucky I didn't get pushed into another car!
I was lucky though. I burned a very tiny part of my cheek on the air bag but was otherwise 100% fine. The Integra was toast.
I would spend the next two weeks slow walking the insurance company while I searched for a new car. I was able to foot the bill for a rental car, while the insurance company sorted things out, and patiently look for a new car because I had an emergency fund.
The fund wasn't big, at the time it had about two months of expenses for a single guy without a car payment – or a little over a thousand dollars. I was still building it up when it got its first test.
My goal was to get six months, which was around $6,000 for me. ~$3,000 for rent, ~$3,000 for living expenses which was probably on the low end if it all hit the fan but that was my target.
How did I decide six months of expenses? Easy, I picked the worst case scenario and decided to play it out to see how much it would cost me.
What was my worst case scenario? Getting fired.
What would I do if I got fired? I'd probably look for a job for a month or two. If I couldn't find one, I'd break my lease and move back home. Worst case it would probably cost me about six months of expenses.
Don't make it more complicated than that. Most other problems you face will be smaller than losing your primary income source so if you account for that, you should be all set.
Experts recommend six to twelve months. But what do experts know? You should save as much as you need to sleep easier at night.
I recommend a minimum of 3 months though, because that will help me sleep easier at night knowing that what I told you!
If the answer is 6 months, save up to six months. If the answer is 12, save up to 12 months. The opportunity cost of that money isn't enormous, but it does help you avoid financially expensive credit card debt or emotionally expensive loans from family and friends should you run into an emergency.
As a near term target, especially if you don't have any savings whatsoever, is to pick small amounts. $100. $200. $300. Don't get all crazy and aim for $1,000 or $5,000 — save up $100 this month so you can cover 50% of potential emergencies. Get it to $200 next month. You'll get funded to $1,000 in a year and that should cover 90% of your potential problems.
Also, if you happen to run into an emergency before your fund is set up, here are alternatives to an emergency fund that make sense as a stop gap measure.
Where did I put my rainy day fund? An online savings account so it could earn some interest. I don't really care about the interest, it'll be cents on the dollar, but it's better to get something more than zero. Whatever you do, don't put it at risk in the stock market or your friend's hot new investment. Don't be crazy.