One of my goals for this blog is to try to provide authoritative answers to some of the most commonly asked questions about money.
One such question is:
“How much do I need to save in an emergency fund?”
Long ago, I answered that question with a way-too-complicated formula. It was an interesting way to tackle it, but ultimately I think you want—and I want to provide you with—a much simpler answer.
The good news is that if you save just $1,000, you’ll be better off than more than a third of working Americans. According to a MetLife study on emergency savings last year I found in a New York Times blog post on the subject, 36% of full-time employees in the U.S. have less than $1,000 saved and 46% have less than $5,000.
Assuming you want to do better for yourself, just how much is enough?
Unfortunately, even financial pundits don’t always agree on a magic number for your rainy day savings. Dave Ramsey says to save between three and size months expenses and Suze Orman says eight months.
But as you can see in reader responses to a similar question on the blog Get Rich Slowly, everybody has a different opinion on how much should be in an emergency fund. Ultimately, I more or less agree with J.D. who, in turn, is agreeing with Dave Ramsey.
- Start with $1,000 in savings.
- Pay off credit card debt.
- Save at least three months expenses, six months if you can.
Where my philosophy differs from Ramsey is that he’ll tell you to pay off student loans and other low-interest debts before saving cash for an emergency. Personally, I would pay off high-rate credit cards, then pad my emergency funds before paying off loans with interest rates lower than six or seven percent.
When it comes down to the final amount, well, personal finance is personal, and it’s ultimately up to you. If you’re young and single and just starting out in your career, three months should suffice. As you add responsibilities like a mortgage and a family, however, you’ll probably want to save more. My wife and I recently exceeded six months’ expenses, which we’re satisfied with for now.
What do you think? How much—in terms of months’ living expenses—seems right to you?