Start An Emergency Fund
It is standard advice in the personal finance world that everyone needs an emergency fund for the unexpected scenarios in life. There are still a lot of people that need to follow through with this advice before it’s too late. How are Americans doing with their saving?
According to a survey by GoBankingRates, 69% of Americans have less than $1,000 in the bank and 34% have $0 saved. This is pretty much constant across all age ranges as seen by the following graphic.
Obviously this is some scary information. Americans have not learned the lessons of the Great Recession. Rather than just preaching about starting an emergency fund it is also important to know the appropriate size.
How much of an Emergency Fund do you need? It turns out that the experts have various opinions.
Fidelity suggests setting aside at least three to six months’ worth of living expenses. If you’re single and on your own but have family backup, you might be comfortable with three months of savings. However, if you have a spouse, kids, and a mortgage to support, you might sleep better with six months or even more.
Putting aside 3 to 6 months’ worth of expenses is a good rule of thumb, but sometimes it’s not enough. If you’re able, you might want to think about expanding your emergency savings.
If you are part of a two-income household or you’ve had a steady job for several years, then a three-month emergency fund is probably fine. But if you are a one-income family, self-employed or earn straight commission, then a six-month emergency fund is a better idea because a job loss would mean you couldn’t pay the bills.
A million potential scenarios could drain your savings without warning, so it’s better to have at least eight to 12 months’ worth of living expenses squirrelled away.
What is the Right Emergency Fund Size?
This is a tough balancing act. You need to have enough money saved in case you really need it. You also don’t want to limit your investing potential by saving too much.
Based on the opinions of the experts you really need to have an emergency fund that covers 6 to 12 months of expenses. How much of an emergency fund do you have?