How Much Money Should Be in Your Emergency Fund?
According to a 2022 Bankrate survey, more than half of Americans don’t have enough savings to cover a $1,000 emergency.
Are you in this category? How would you cope with a big, unexpected expense? What if you have a leaking roof or an emergency doctor visit? Or a sudden loss of income?
These unexpected events could be stressful and costly, but having a well-funded emergency fund could be the difference between a minor inconvenience and years of repaying high-interest debt.
So, how much emergency fund planning do we need to do? Well, let’s find out!
How Much Should I Have in My Emergency Fund?
The amount of money that should be in your emergency fund varies depending on your unique financial situation.
A general rule of thumb is to have 3-6 months’ worth of living expenses stashed in an accessible savings account. This can help cover unexpected expenses such as job loss, medical bills, or home repairs.
A smaller emergency fund may be sufficient if you have a stable income and low monthly expenses.
If you have a variable income, medical bills, or are self-employed, it’s recommended to have a bigger emergency fund.
“It’s also vital to consider your risk tolerance and the level of uncertainty in your life,” says David Neuwirth, Senior Vice President of Investments for David Lerner Associates. “For instance, if your job is likely to be affected by a recession, you have dependents or a large debt, consider beefing up your emergency fund.”
Ultimately, the goal of an emergency fund is to provide financial security and peace of mind in the event of an unforeseen expense.
How to Calculate Your Emergency Fund
To calculate the amount of money, you should have in your emergency fund, you will first need to determine your monthly living expenses.
Here’s a general guide on how to do it:
- List all your fixed expenses (rent/mortgage, utilities, car payments, insurance, cellphone bills, etc.).
- Add up your variable expenses (groceries, gas, entertainment, etc.).
- Multiply your total monthly expenses by the number of months you want your emergency fund to cover. For example, if your monthly expenses are $2,000 and you want your emergency fund to cover 6 months, you’ll need to save $12,000.
- Consider adding extra money for unexpected expenses. It’s always advisable to have more than you need.
- Review your emergency fund regularly and fine-tune it as your needs and expenses change.
It’s worth mentioning that if you have a lot of debt, you might assign part of your emergency fund to clear the debt and then build up your emergency fund again.
How to Build Up Your Fund
- Minimize your discretionary spending – Scrutinize your budget to determine if you can reduce any spending every month (then do it!)
- Open a savings account – If you don’t have one already, open a high-yield savings account that’s accessible for emergencies. Either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) should ensure the account.
- Set a savings goal – The goal should be based on how much you need in an emergency fund. After reaching your goal, continue funding your other savings goals.
- Pay yourself first – Set up automatic payments from your checking account to your designated savings account for when you’re paid.
- Direct any unexpected or extra income into your emergency fund – This can be a stimulus payment, cash birthday gift, windfall, or tax refund.
Conclusion
An emergency fund is a vital part of your overall financial plan and should be a priority in your budgeting and savings goals.
The amount you save should be based on your individual needs and goals.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc.
This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances.