These days, things can seem a bit more uncertain than we’re used to. Pandemic shutdowns, market volatility, and more are causing millions of Americans to rethink their saving plans. People across the US are starting to save up an emergency fund, just in case. An emergency fund can save the day if you have one when you need it.
At most estimates, the average American should plan to have between 3 and 6 full months of living expenses at the minimum. Depending on your means and the circumstances, you may even want to sock away an entire year’s worth of money. Living expenses in our case means, all of your bills, mortgage or rent, food, discretionary spending, everything.
If this sounds like a lot of money, you’re absolutely right! That doesn’t make it impossible, but it does make it challenging. You may not need that much based on your particular situation, but we are going to help you figure it out.
The 3 To 6 Month Rule Of Thumb
Most experts say that keeping 3 to 6 months of living expenses based on your current pay is enough of an emergency fund. You might be able to get away with less than 6 months of expenses if:
- You have minimal debt
- Your cost of living is relatively low
- Your rent does not fluctuate much, if at all
- You have reliable transportation
- Your job is stable
- You have no kids or pets
- You enjoy generally good health
While not all of these would have to be true, you can see how they give you an idea of the fluctuations and potential “surprise” expenses that may happen in some cases. This is often considered the best-case scenario for an emergency fund.
You may want to consider saving much closer to 6 months of expenses if:
- You have some relatively low-interest debt
- It would be difficult to replace your current job
- You own a home
- Live in a high cost of living area
- You have children
- You have any medical issues
- Have dangerous or high-risk activities
- Have no financial support outside yourself
6 To 12 Months Of Expenses
There are scenarios when you may want to have a much larger financial cushion. This is not just in case something happens to you or your source of income, but also to augment your potential retirement if you are not already retired. Consider saving up to a year’s worth of expenses if:
- You provide solely for multiple dependents
- You are approaching or at retirement age
- Your job is highly specialized, a niche position, or may need you to relocate at some point
- You are a high-income earner
Once you have decided how much you should save, be sure to set that goal and stick to it. Break it into milestones of one month worth of expenses each, this helps you reach smaller goals on the way to your eventual goal of an emergency fund.