How much money should you save in an emergency fund? The answer depends on your individual financial circumstances. However, experts suggest some rules of thumb everyone can follow.
Let’s take a look at two of the most popular recommendations.
Save several months of living expenses
The most common recommendation is that people save three to six months of living expenses in an emergency fund, particularly if they don’t carry any other high-interest debt besides a mortgage.
However, some finance experts urge people to set aside six to nine months of living expenses. Jean Chatzky, financial editor at NBC’s Today show, recommends following that guideline. Best-selling author Suze Orman takes it a step further, recommending an emergency fund that can support eight months of your living costs.
Why so much money? Jobs are scarce in today’s economy, so you need to prepare in case you’re laid off and can’t find another position. And if two or more economic calamities strike at once — such as a job loss combined with a leaking roof and medical co-pay bill — you’ll be happy you have such a large emergency fund.
Save up to $1,000
An alternative approach is to save $1,000.
Some financial experts say that if you carry high-interest debt, you should tackle the debt first before building an emergency fund. Put $1,000 toward a credit card balance and you are likely to save more on interest payments than you can generate in a savings account.
Besides, if a true emergency unfolds, you can rack up the same $1,000 on your credit card — thus putting you back where you started.
But not all financial writers agree with that advice. Popular finance expert Dave Ramsey says that if you’re carrying any debt other than your mortgage, you should put $1,000 into an emergency fund. Once you have done that, earmark every other dime you have for crawling out of debt.
Why put money into a low-interest-bearing savings account while simultaneously paying a high interest rate on debt? Mathematically, it may not make sense.
However, humans aren’t calculators. We’re creatures of habit. And saving $1,000 in an emergency fund teaches us to turn to our savings, rather than our credit cards, when disaster strikes.
Paula Pant helps people ditch the cubicle and live on their own terms. She’s traveled to 30 countries, owns six rental property units and hasn’t had an employer since 2008. Her blog, Afford Anything, is the gathering point for a tribe that refuses to say, “I can’t afford it.” Follow Paula on Twitter: @AffordAnything.