How much do you need for an emergency fund?
How much do you need for an emergency fund? It’s part of the budget you should set aside for a fund in case of an out-of-the-norm situation, remembering that, in some cases, low-cost insurance won’t cover.
According to a recent Bankrate survey, about 6 in 10 U.S. adults say they are uncomfortable with their level of emergency savings.
On this front, many money experts would tend to agree with the public, but how much do you need for an emergency fund?
Financial planners generally recommend putting away three to six months of living expenses in an emergency fund.
How much do you need for an emergency fund?
More than half of Americans (56%) say they have less than three months of expenses saved, including 27% who say they have no emergency savings at all.
But when considering what it would actually look like to save the equivalent of three months’ worth of expenses, you may be shooting too high if you base your calculations on your current monthly budget.
After all, if you had the kind of emergency that would require you to live off your cash reserves, items like your tennis lessons and monthly house cleaning would likely be off the table.
According to specialists, how much do you need for an emergency fund?
“When planning an emergency fund, it’s essential to strike a balance between ambition and practicality,” says Alyson Basso, a certified financial planner with Hayden Wealth Management in Middleton, Mass.
While three to six months is a worthwhile goal, saving for it can be daunting, she says.
“What can make this more achievable (and ultimately more useful) is to think about saving for three months of essential expenses rather than your current lifestyle costs.”
How much do you need for an emergency fund – why?
When it comes to your financial priorities, establishing an emergency fund should be at the top of your list, which may seem counterintuitive.
When I have so many goals, needs and wants competing for my money, why put them in a place where I hope to never use them?
How much do you need for an emergency fund?
The point is that something will come up. And when it does, having an emergency fund keeps you from taking money away from your other financial goals.
“Think of an emergency fund as a buffer between you and high-cost debt or forced asset sales in the event of unplanned expenses or reduced income,” says Greg McBride, chief financial analyst at Bankrate.
In other words, if you need new tires, your dryer breaks down or you get laid off, you won’t have to rack up a pile of credit card debt or cash out your 401(k) to stay afloat.
The guidelines recommended by financial planners are meant to put you in the right ballpark in case you’re faced with a major emergency, such as a job loss.
But thinking about what three months of ordinary expenses looks like may make you think you need more than you really do.
Focus on what you would need to get by, including housing, utilities, food, medical care and minimum payments on any debts.
But eliminate many of your discretionary expenses to have a more accurate and accessible version of your emergency budget.
“If you normally spend $4,000 a month, but estimate that you could get by on $2,500 by cutting out nonessentials, then your three-month emergency fund would be about $7,500 instead of $12,000,” Basso says.
But even if you have a high income, it’s worth considering what your specific financial situation might look like in an emergency.
