How much money do you really need in an emergency fund: ‘It’s essential to strike a balance between ambition and practicality’

How much money do you have set aside for emergencies? If you’re like most Americans, the answer is, “less than I’d like.”

About 6 in 10 American adults say they are uncomfortable with their level of emergency savings, according to a recent survey by Bankrate.

On this front, many money experts would tend to agree with the public. Financial planners generally recommend stashing away three to six months of living expenses in 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 considering what three months’ worth of savings would actually look like, you might be a little 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 on your cash reserves, line items like your tennis lessons and monthly house cleanings would probably be off the table.

“When planning for an emergency fund, it’s critical to strike a balance between ambition and practicality,” says Alyson Basso, a certified financial planner with Hayden Wealth Management in Middleton, Massachusetts. Â

While three to six months is a valid goal, saving for it can seem daunting, she says. “What can make this more attainable — and ultimately more beneficial — is to think about saving three months’ worth of essential expenses rather than actual living costs.”

When it comes to your financial priorities, building 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 dollars, why put them in a place I hope I never use?

The thing is, something will come up. And when it does, having an emergency fund prevents 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 goes out, or you get laid off, you won’t have to pile up a bunch of credit card debt or cash in your 401(k) to stay afloat .

The guidelines recommended by financial planners are meant to put you in the right position if you encounter a major emergency, such as losing your job. But thinking about what three months of ordinary expenses looks like can trick you into thinking you need more than you actually can.

Focus on what you need to accomplish, including housing, utilities, groceries, health care, and minimum payments on any debt. Cut out a lot of your freebies to give yourself a more accurate and accessible version of your emergency budget.

“If you typically spend $4,000 a month, but estimate you could get by with $2,500 by cutting back on non-essentials, then your three-month emergency fund would be about $7,500 instead of $12,000,” says Basso. “This approach not only makes the goal less intimidating, but also better matches the reality of how your expenses would change in an emergency.”

How much you need depends on your unique financial situation, including your job stability, marital status, and personal philosophies about money.

“There’s some psychology involved,” says Donnie LaGrange, a CFP with Murphy & Sylvest Wealth Management in Dallas. “Some people want a bigger pad or worry, while others are fine going pretty skinny and just stick to the bare minimum.”

In general, if you have a steady job, a high-earning spouse you can rely on for income and insurance, and ways other than retirement savings to access cash, you can stay on the bottom. the last of the emergency savings – maybe three months of bare expenses, he says. But a single family household may lean more toward six months.

But even if you’re a high earner, it’s worth thinking about what your specific financial situation might look like in an emergency.

“We have a client who is a lawyer at a high level in a very specific location,” LaGrange says. “He thinks that maybe he would need a year to find the right opportunity, that is his.” [emergency fund] it is worth one year”.

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