What is the ‘right’ amount of emergency savings?
Most Americans know that having an emergency savings fund to cover the costs of sudden expenses can help them avoid credit card debt and financial ruin. However, knowing exactly how much to put into an emergency fund can be challenging. Too little may not enable households to cover an unexpected cost that arises. A recent Bankrate.com survey reveals 54 percent of Americans have more emergency savings than credit card debt, making it slightly easier to weather financial storms. However, 25 percent said their credit card balances exceed their emergency cushion.
Before settling on a specific amount, it’s important for households to set a foundation for their emergency fund. Saving a year’s worth of living expenses can be quite daunting at first, but having a little money in the bank can give individuals a good jumping-off point and encourage them to keep going. Most experts recommend saving 10 percent of their paychecks to get started.
But when it comes to deciding on a specific amount, there are several factors to take into consideration. Conventional wisdom tells most households to strive for at least three to six months’ worth of savings to cover all their living expenses. This includes housing, transportation, bills and day-to-day needs. However, a more common “better safe than sorry” mindset has been adopted by some experts, who recommend saving roughly nine months to a years’ worth of living expenses. This is largely in response to fears over job security and the ability to stay afloat for up to a year while individuals are job searching.
In addition, experts urge adults to take all their living needs into account as well as several factors, such as whether they are a two-income family or have other sources of income.
“It’s a common mistake to underestimate your expenses or to just think about fixed expenses such as a mortgage,” Scott Cramer, president of financial planning firm Cramer and Rauchegger, told Bankrate.com. “I suggest people look at what they are spending on everything, including gas, food and child care, then estimate how much they will need.”
Lastly, individuals should make sure they have quick access to their funds in the event of a crisis. While emergency funds should be kept separate from regular savings, adults may benefit from keeping their rainy-day cushion in a high-yield savings account or other liquid account.