You’re probably familiar with the emergency fund “rule”: save 3-9 months of expenses to cover a potential unforeseen expense. And while that’s a great rule to follow, few people have actually saved – a 2021 GoBanking survey found 40% of Americans have less than $300 in savings – so we asked the pros: If a solid emergency seems out of reach for now, what is the minimum amount of money you need in savings?
Chanelle Bessette, banking specialist at NerdWallet, says you should try to have at least $1,000 on hand. “A small emergency fund of $1,000 should cover most minor emergency expenses, such as buying new car tires or an emergency trip, such as caring for a family member in the hospital or attend a funeral,” explains Bessette.
And Charles Lattimer, vice president of innovation and growth at FinFit, supports the original goal of saving $1,000. “It’s 100% psychological and practical. Psychologically, most working Americans can achieve this goal within a few months to a year. Practically, research shows that about 90% of all unexpected emergency expenses can be covered with $1,000,” Lattimer says.
Of course, that $1,000 is a starting point. “The destination is having enough savings to cover 6 months of expenses, but since what constitutes 6 months of expenses is a moving goal, the most important thing for households is not whether you have arrived at destination, but if you’re on a savings trip at all,” says Greg McBride, chief financial analyst at Bankrate. (Another thing to consider: you really need about six months of essential expenses so you can pay all your basic bills, which might make this goal a little easier to achieve.)
Why an emergency fund is so important
As the early stages of the pandemic demonstrated, job loss and income disruption can come suddenly and with very little warning. “Having an adequate emergency savings cushion is a buffer against high-interest debt and drastic or desperate lifestyle changes until household income rebounds,” says McBride.
This emergency fund can also prevent you from tapping into funds you need for other reasons. “You don’t want to have to dip into your invested assets or retirement accounts, which would cause tax problems and could force you to sell at an inopportune time,” says Stephen Carrigg, Certified Financial Planner and Director of Equity Analysis. investments at Integrated Partners. .
How to save for your emergency fund
To start building emergency savings, Anne Marie Ferdinando, member outreach manager at Navy Federal Credit Union, recommends creating a detailed budget. “Your budget will be a useful guide to keeping your spending within certain parameters, but it should also specify certain savings goals. Saving might seem difficult right now, but include a reasonable monthly line item to build up your savings account, emergency or to contribute to a tax-advantaged retirement account will make a huge difference in the long run,” says Ferdinando.
One place to look: online savings accounts offered by federally insured banks and credit unions, which offer security while allowing access to money without penalty when needed. “They consistently pay better returns than most banks’ savings accounts and other cash investments such as money market funds,” McBride says. “Look for a savings account with a low minimum initial deposit and no permanent balance requirement; many are available with competitive yields,” says McBride.
Of course, in an environment of rising inflation, having too much savings is also not ideal. “When it comes to finding a savings account, the interest rates are usually very low. Some banks offer better rates than others, but most of them are close to 0%, which is why we don’t want people holding too much cash,” says Carrigg.