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Emergency Savings...How Much Do You REALLY Need
July 15, 2017
Do you know that 29% of Americans do not have any emergency savings? This number has gone up 3% from last year and is at the highest it has been in 5 years.
Expert opinion regarding how much you should have in an emergency fund can vary quite a bit. However, a good rule of thumb is to start off with a minimum of 3 to 6 months to cover living expenses. In fact some experts believe that you should have as much as 2 years as an ideal emergency savings goal. The one thing that experts agree upon is that failing to save an emergency fund is a big misstep.
Many Americans have competing financial goals such as saving for retirement while paying down credit card debt. While working to achieve these financial goals, there will always be things that pop up that will impact your finances. If these unexpected things are always handled with credit, then you can never achieve your financial goals. Having an emergency savings allows you to handle the unexpected issues while still achieving your financial goals.
Only 22% of Americans have 6 months of living expenses in an emergency fund which is a 5 year low. Another 15% of Americans had 3 to 5 months saved for unexpected expenses. Even more concerning is that 21% of Americans can cover less than 3 months of their expenses in the event of an emergency.
The biggest factor to determine how much you really need in an emergency savings fund is your personal situation.
Job Security - The more secure your job, the less money you need to have in an emergency fund. The less secure your job, the larger your emergency fund needs to be for unexpected situations. Freelancers, salespeople on commission, contractors should have a larger emergency fund.
Skill Marketability - Americans have more possibilities in today’s job market. However, if you have a highly specialized position, you need to have a larger emergency fund especially if there are few openings in your field. In addition, if you are older and lose your job, it can take longer to find a new position within your field. The more diverse your skill set, the more likely you will be able to remarket yourself if you lose your job so you will need a smaller emergency savings fund.
Monthly Expenses - You need to determine your monthly expenses in an emergency situation to determine what you will really need in an emergency. Your emergency savings should cover mortgage/rent, groceries, and utilities. You can cut out eating out, entertainment, gardener, etc. and take care of those things on your own until are on your feet again.
Your Family’s Income - If both you and your spouse work, you can save less in an emergency fund. The likelihood that both you and your spouse will be out of work at the same time should be low, therefore, you should need less money in an emergency savings fund. If you only have one spouse working, you will need to have a larger emergency fund since there will be no income coming in if there is an emergency.
Possible Emergencies - Losing your job is only one reason to save for a rainy day. However, that are other financial struggles that can put a family in crisis. Some Americans are aware of health issues that are hereditary and should have a bigger emergency cushion. For example, if you know that cancer runs in your family, you should plan a bigger cushion.
Additional Assets - What other option do you have in addition to cash? You may be to have a smaller emergency fund if you have the ability to obtain a home equity loan, investment, or 401(k). Even if you do not want to use it, the fact that you have it and can access it if needed in an emergency means you can save less in an emergency.
You Comfort Level - There is no dollar amount on comfort' level. What is your family's peace of mind, may be significantly different from another’s. You need to evaluate what you family needs in living expenses are during an emergency and plan accordingly.