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An emergency fund exists so that when life blindsides you, you reach for savings instead of debt, according to Michael McAuliffe, president and founder of Family Credit Management.
But is the expert-recommended amount for an emergency fund still enough? Find out how much you really need in your emergency fund.
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Emergency Savings Rule of Thumb
Read any financial advice and you’ll often see that experts recommend having three to six months of expenses in an emergency fund. But does that hold true today?
McAuliffe said that this rule of thumb is a fine starting point, but, in his opinion, it’s no longer enough for most people. He said in today’s economy, having six to eight months of expenses in an emergency fund is something he recommended without hesitation.
“Job searches are taking longer than before,” he said. “Medical costs keep rising. Housing costs have made the margin for error much thinner for a lot of families. Three months of savings feels comfortable until you actually need it and then it disappears faster than you expect.”
Who Needs To Save More Than 3 to 6 Months of Expenses?
McAuliffe said that people who have dependents, live in single-income households, are self-employed, are employed in a volatile industry or who have significant fixed expenses, such as a mortgage, all need more in their emergency fund than many experts recommend.
Who Would Probably Be OK With Only 3 to 6 Months of Expenses Saved?
According to McAuliffe, people with dual-income households with strong job security and minimal debt — where one income could cover essentials if need be — can usually get by with a little less saved up.
“But even then, I wouldn’t go below three months,” he said. “That should be the absolute floor, not the target.”
Which Monthly Costs Should People Include When Calculating Their Number?
When figuring out your emergency fund target, McAuliffe said to include the essentials or what you absolutely must pay to keep your household running, including the following:
Housing (mortgage or rent, insurance, property taxes if not escrowed)
Utilities
Groceries
Transportation (car payment, insurance, fuel)
Minimum debt payments
Non-negotiable medical or childcare costs
He said discretionary expenses, such as dining out, subscriptions, entertainment and clothing, should be left out.
“In a real emergency, those go away,” he added. “Your number should reflect a lean but stable version of your monthly life, but not your normal spending.”
What Mistakes Do People Make When Deciding How Much They Need?
McAuliffe said the biggest mistake people make when calculating their emergency fund target is using the amount of normal monthly spending instead of just their essential expenses.
“When people multiply their regular spending by six, the number can feel too high and keep them from starting,” he said. He recommended starting a fund based on essential spending only because that target is easier to reach and not so overwhelming.
Another mistake people make is keeping their emergency savings account at the same bank as their checking account, McAuliffe said. He explained that it makes it too easy to instantly transfer funds because you want something.
He recommended keeping your emergency fund in a high-yield savings account at a separate bank because you’ll have to wait a day or two before receiving cleared funds, which may be enough to help you avoid temptation.
How To Get Started Saving
Saving months’ worth of expenses can be daunting, but McAuliffe has the following suggestions to make it easier.
Save $500 as an initial goal, then $1,000 and so on.
Treat savings deposits like a bill that needs to be paid every month.
Set up an automatic transfer to your savings on payday, even if it’s only $50.
Building the habit matters more than the amount in the early stages.
Every dollar you don’t spend needlessly is a dollar that can go toward your emergency fund.
“For example, if you make a decision not to stop for that latte you were thinking about, transfer the cost of it into your savings account, right away, before you forget,” he explained. “These small decisions add up to hundreds and sometimes thousands of dollars over the course of a year. More importantly, they rewire how you think.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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