How Much Emergency Fund Should You Have And How To Get There

If you watched the nightly news during the latest government shutdown you would have seen stories about how people struggle when they aren’t getting a paycheck.  Most Americans are not immune to having a set back at a job and it is a scary feeling to not know when the next paycheck will come.  The emergency fund is what will help you bridge the gap in these hard times.  This article should help determine how much emergency fund you should have and strategies on how you can get there.

We make a point of this in every financial plan we put together because of its importance.  A lot of people will say their job is secure so they don’t need to worry about having an emergency fund.  This may be true, nevertheless the emergency fund is not only for the most extreme circumstances but any unexpected expense.  Anyone can have an unforeseen cost of $1,000 to $5,000 and most people would have to pay for this expense on a credit card that will accrue interest and take time to payoff.

Another common thought is, “I have disability insurance, so I don’t need an emergency fund”.  Most disability insurance will not start until a 90-day elimination period has been met.  This means you will be out of a check for that period but still have all the expenses you normally would.

Current Savings In The United States

“Smartasset” came out with a study in November 2018 that stated; of those Americans with savings accounts, the average savings account balance was $33,766.49.  This seems like an amount that would be enough for most people to have in a “rainy day fund”.  But that is the average.  Super Savers with very large balances will skew this calculation so we use the median which more accurately reflects the state of most Americans.  The median balance is only approximately $5,200 per “Smartasset”.

With a median balance of only $5,200, it doesn’t take much misfortune for that to be spent down to $0.  At $5,200, it is safe to assume that most Americans are living paycheck to paycheck.

If your income only meets your normal expenses, you need to ask yourself the question “where am I coming up with the money for an unexpected cost?”.  For a lot of people, it is a credit card, another type of loan, or dipping into their retirement assets.  By taking care of the immediate need, you shift the burden to another part of your financial wellbeing.

Emergency Fund Calculator

There is no exact dollar amount but a consensus in the planning industry is between 4-6 months of living expenses.  This is usually enough to cover expenses while you are searching for the next paycheck or to have other assistance kick in.

It is important for everyone to put together a budget.  How do you know what 4-6 months of living expenses is if you don’t know what you spend?  Putting together a budget takes time but you need to know where your money is going in order to make the adjustments necessary to save.  If you are in a position that you don’t see your savings account increasing, or at least remaining the same, you are likely just meeting expenses with your current income.

Resource:  EXPENSE PLANNER to help you focus on your spending.

I Know My Number, How Do I get There?

Determining the amount is the easy part, now it is getting there.  The less likely option would be going to your boss asking, “I need to replenish my emergency fund, can you increase my pay?”.  Winning the lottery would also be nice but not something you can count on.Changing spending habits is an extremely difficult thing to do.  Especially if you don’t know what you’re spending money on.  Once you have an accurate budget, you should take a hard look at it and make cuts to some of the discretionary items on the list.  It will likely take a combination of savings strategies that will get you to an appropriate emergency fund level.  Below is a list of some ideas;

• Skip a vacation one year

• Put any potential tax refund in savings

• Put a bonus check into savings

• Increase the amount of your paycheck that goes to savings when you get a raise

• Side work

• Don’t upgrade a phone every time your due

• Downgrade a vehicle or use the vehicle longer once paid off

Reward Yourself

There is no doubt some pain will be felt if you are trying to save more and it also takes time.  Set a goal and stick to it but work in some rewards to yourself.  If you are making good progress after say 3 months, splurge on something to keep your sanity but won’t impact the main objective. 

Where To Keep Your Emergency Fund?

This account is meant to be liquid and accessible.  So locking it up in some sort of long term investment that may have penalties for early withdrawal would not be ideal.  We typically suggest using an institution you are familiar with and putting it in a savings account that can earn some interest. 

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.