How Much Should You Have in an Emergency Fund? (Expert Roundup)

You have definitely heard the advice that you’d better have an emergency fund to pay for unexpected expenses thus protecting yourself from unanticipated events. Money philosophies may differ, but most financial experts agree that for a healthy financial plan it’s necessary to have some cash set aside for emergencies.

We are sure that guessing is not the best way for making financial decisions. So we decided to ask financial experts what would they answer to a person asking “How much money should I have saved in an emergency fund?” And we’ve got a bunch of great tips we can now share with you.

But this roundup won’t be sufficient enough if it doesn’t explain the basics. So, let’s start with the definition of the emergency fund.

What is an emergency fund?

It is an easily available savings account intended to help one manage future mishaps and/or unexpected expenses such as the job loss, a debilitating illness, or a major car or home repair.

Shane Robson-Smith, CPFC

Shane Robson-Smith, CPFC

Founder of Workplace Money Coach, Inc

One of the very best things you can do to protect your family and keep your money management machine running smoothly is to always have some cash set aside for unexpected expenses that pop up. When you have savings earmarked specifically for emergencies, you can weather the inevitable financial storms that we all will live through, be it a car repair, ER visit, air-conditioning maintenance in the middle of summer or the unexpected need to travel to help out family. 

Commit to stashing away some cash in and Emergency Fund and do it quickly with these five simple saving strategies:

Michelle Buonincontri, CFP®, CDFA™ and Financial Coach

Michelle Buonincontri, CFP®, CDFA™

Financial Coach of New Direction Financial Strategies & Being Mindful in Divorce

Unfortunately it is in times of crisis that most of us learn, so let’s try to see the opportunity created by the Covid-19 potential obstacles including medical costs and income loss.

Now’s the time to create or revisit that spending plan. Identify and cancel all non-essential expenses – such as gym memberships, Spodify, Pandora, Audible, gaming, put car insurance policies for 2nd vehicles/motorcycles in ”storage” status, even call creditors to reduce interest rates now that the Fed reduced interest rates again in early March.

This may even be a good time to consider a mortgage refinance if rates are lower, you have the extra cash for closing fees, and will be in your home long enough to recoup those closing fees against the lower interest rate.

An emergency fund of 3-6 months for non-discretionary or essential expenses is a great starting point. Folks may consider moving back to minimum credit card payments or reducing retirement savings to instead save those amounts and help build that cushion right now.

Bethany McCamish

Bethany McCamish

Owner of His and Her FI Blog

The amount you put into your emergency fund depends on where you’re at with other financial goals.

It’s always a good idea to have at least $1000 put aside. Once this is done you can build the emergency fund up alongside your other goals.

While my partner and I pay off my student loan debt, we are only putting another $200-$300 a month towards the emergency fund. We both contribute to our retirement plans as well.

Your emergency fund is important for peace of mind, but so are your other goals. Student debt needs to be paid off so we can have more control over our money.

The emergency fund takes care of your short term future self, while your retirement (investments) take care of your long term future self. This is why we pursue all of these goals at the same time. It’s a well-rounded approach to the emergency fund.

Sarah L. Carlson

Sarah L. Carlson, CFP®

Financial Advisor at Fulcrum Financial Group

Is creating an emergency fund a high priority to you, but you aren’t sure where you can afford to save even more in 2020? If you are looking to save more, it might seem impossible if you aren’t sure where you can squeeze out any spare cash.

The trick to saving is to be more conscientious about where your money is going in the first place.

Saving truly begins with your mindset. Don’t think of saving as restrictive or not fun – it doesn’t mean you have to quit spending altogether. It just means you are placing a higher priority over your long-term financial well-being over what you want right now.

Here are some emergency fund tips that I frequently use when coaching my clients:

By paying more attention to what you are pulling your credit card out for each day, you will begin to notice patterns ways you can potentially use to save even more. You are worth knowing what you are spending, so quit blinding spending without a thought. By investing in yourself, you are creating the foundation for a stress-free retirement, which is something that money truly can’t buy.

Sallie Mullins Thompson

Sallie Mullins Thompson

CPA/PFS, CFP, CDFA, MBA

For 1-wage earner households, the fund should hold money for at least 6 months of mandatory expenses – for 2-wage earner families, 3 months is the minimum.

It should be totally liquid which means in a bank checking or savings account.

It should never be used for anything else. If it dips below, then it should be replenished as quickly as possible.

This is a #1 priority for everyone to have in place – before other savings, even 401Ks with a match. 

Jay Spector, CFP

Jay Spector, CFP®

Partner - Wealth Advisor at Barton Spector Wealth Strategies

We are living through unprecedented times. Most investors haven’t experienced market situations like this.

We are talking with clients and are helping them keep the current situation in perspective. It is important in times like this to get a fresh look at your investment plan and your other financial plans, including insurance (life, long-term care, disability and health) as well as any business-related insurance clients may have.

In addition, it is also important to make sure you have your emergency fund – or your financial cushion – in place.

In our opinion, an emergency fund should be at a level to comfortably cover six to nine months of household expenses (mortgage/rent, food, gas, insurance and other expenses). Some people like to have their emergency fund in readily accessible cash, a line of credit or both.

To us, it is important to have something!

We have seen clients segregate these cash funds into separate accounts or even using a separate financial institution in order to avoid the temptation of dipping into the funds for things other than a financial emergency or unexpected expense.

Bottom line: It is essential that people have access to funds in an emergent situation. Having an emergency fund or cash reserve established for you and your family can make or break your financial life. A financial emergency can be a speed bump, or it can be a financial tsunami if you are not prepared. An emergency fund can soften the blow and help you deal with life’s unexpected curveballs (unemployment, unexpected expenses, etc…).

Rob Greenman

Rob Greenman

Lead Advisor, Partner, CFP®

Six months is a figure that commonly is used for emergency funds.

Another consideration is where to park these funds and/or account types that should be utilized.

Health savings accounts can sometimes be a wonderful “emergency fund” savings vehicle. The strategy here would be to max out your HSA, have funds carved aside and growing tax free. The individual wouldn’t use this funds to cover medical expenses, instead paying out of pocket. Medical receipts and expenses could be tracked and saved along the way. Then, if a rainy day comes, the individual could pull funds out tax-free up to the amount of medical expenses that had been tracked/incurred along the way.

This can be a wonderful forced savings vehicle that combos as a potential rainy day fund.

Angela Giboney, CFP

Angela Giboney, CFP®

Certified Financial Planner TM professional

If one income family, you should save one month of expenses for every $10,000 of annual income. 2 income families can reduce that by a factor of 25 percent.

This may seem overwhelming so starting by focusing on three months of expenses is terrific and this will be sufficient for many scenarios. Once you have the three months in place, continue saving while working on other goals until you reach 1 month of expenses for every $10k in annual salary.

Chris Chen, CFP®, CDFA™

Chris Chen, CFP®, CDFA™

CEO / Wealth Stategist at Insight Financial Strategists LLC

Emergency Funds are academic until they are not!

So many people are going to see their incomes cut over the next weeks and months. This is when it pays to have planned.

For most people, we recommend 3-6 months of expenses.

When the crisis is over, it will be time to rebuild. 

Zhikun Liu, Ph.D., CFP

Zhikun Liu, Ph.D., CFP®

Retirement Financial Planning Research Director at Empower Retirement™

When it comes to the emergency fund, the following questions may help us to organize our thoughts and better understand this topic:

In my opinion, an emergency fund is for unexpected hardships (medical emergencies, car/house breakdowns that are outside of insurance coverage, etc.). It is not the fund we save for our next vacation, or for a big item purchase…

The emergency fund should be the money we set aside for life’s unexpected events.

There are lots of “rules of thumbs” for the amount of the emergency fund we should save.

For instance, some people calculate the emergency fund from an absolute dollar amount perspective: We should save from $3,000 to $30,000 depending on the family size, loans, expenses, etc.

Others advise the emergency fund amount from the time period point of view: You should save enough money to cover your family’s non-discretionary spending for 3-6 months.

I tend to agree with the latter.

Emergency funds should be set aside to withstand unexpected financial shocks (such as the income loss caused by the COVID-19 quarantine this spring).  Therefore, we may need to prepare our emergency fund to cover some of the worst-case scenarios.

A total income loss for 3 to 6 months is a good example for this type of scenarios. However, the calculations to determine the amount needed to cover the total income loss is a little more complicated than just multiply our monthly salary by 3 times.

We need to take the following factors into considerations:

Since liquidity is just as important as the quantity when it comes to the emergency fund, we need to pay special attention to the investment vehicles which we use to store the fund.

The most common vehicles include checking, savings, and other money market accounts. However, we can think outside the box and use low interest and highly liquid lines of credits as complementary sources for the emergency fund.

For instance, assume a household is preapproved for a nonrecourse loan of 3% interest with a $10,000 borrowing limit, and they can take out the loan any time they want with little to no delays. Then they can use this line of credit to cover a portion of their emergency fund target up to $10,000.

In other words, instead of keeping $10,000 in their checking account, they can use this $10,000 loan credit to cover their emergency fund needs and invest the $10,000 elsewhere, if the investment return is more than 3%.

This kind of line of credits includes but is not limited to home equity line of credit (HELOC), low-interest nonrecourse loans from your banks, certain types of cash value life insurance policy, reverse mortgage, etc.

Using different types of line of credit wisely can help us to free up the cash we have to hold in the checking or savings account and seek more investment opportunities while getting our emergency fund needs covered.

In summary, an emergency fund should be held in liquid accounts, and should cover the household’s non-discretionary expenses for 3 to 6 months.

The amount of emergency fund which we have to keep in the checking account (or other liquid accounts) can be subtracted by two numbers. The first one is the insurance coverage minus deductibles. The second one is low-interest high-liquidity lines of credits. 

Catherine Valega, CFP

Catherine Valega, CFP®

Wealth Consultant

Emergency savings. I’ve never been supportive of the very low estimates of needing 3-6 months expenses saved.

I encourage my clients to have 12-18 months of expenses saved. This is particularly necessary when entering into a recession, which is quite possible, if not probable.

I also believe in encouraging ‘side hustles’ – there are a lot of ways to make supplemental income via businesses supported virtually (ie, marketing, writing, coding, etc). 

Kristin C. Sullivan

Kristin C. Sullivan, CFP®

Sullivan Financial Planning, LLC

The right emergency fund amount depends on your situation. If you have a partner sharing household expenses, 3 months’ essential bills is a good amount. If you are single and have a fairly reliable job, 6 months essential expenses is a safe target. If you are the family breadwinner and about to start your own business and quit your job, 12 months’ would be a smart cash cushion.

Niv Persaud, CFP

Niv Persaud, CFP®, CDFA®, RICP®

CRPC®, Managing Director at Transition Planning & Guidance, LLC

I prefer using “reserve” instead of “fund” because it is money not used for immediate needs but for future use if there is an emergency.

What is an emergency reserve?

The purpose of an emergency reserve is to cover any expenses that result from an unexpected event that impacts you financially.

These unexpected events could be damage to your home or property due to Mother Nature, an accident or unexpected maintenance.

It could be a critical medical diagnosis that increases your health care expenses. And, it could be from losing your job.

While you may have insurance for some events, there are deductibles and copays to pay. Also, some insurance companies may take several weeks to send you a check.

How much money should be in my emergency reserve?

When determining how much money you need in your emergency reserve, think about how long it would take you to find a new job. Historically, it was recommended for emergency reserves to be at least 3 months of expenses for dual-income households and 6 months of expenses for single-income households.

Times are different and having 3- to 6-months of expenses in your emergency reserve may not be enough if you no longer have a job. It may be realistic to target 9 months of expenses for dual-income households and 12 months of expenses for single income households.

Keep in mind, the more money you make, the longer your job search process becomes – especially if you’re managing people and a P&L. Also, if there is an economic downturn, it will take longer to find a new job.

When calculating the amount of your monthly expenses, focus on essential expenses. This category includes your rent or mortgage, utilities, food, and other expenses you are required to pay.

Should my emergency reserve be cash?

You’ve probably heard you need to keep your emergency reserve in cash, but don’t take that advice literally. The objective is to have quick access to your money in the event of an emergency.

Saving your money in cash equivalents such as a money market account may be acceptable to meet your objective. The more money you accumulate in your emergency reserve – for example $100,000 – you may want to consider using mutual funds which can easily be liquidated in 3 business days.

The bottom line is your emergency reserve should be easy for you to access in an emergency. And remember, when you use your emergency reserve you’ll need to replenish it for the next emergency.

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