According to Jared Andreoli, CFP, financial planner and founder of Simplicity Financial in Milwaukee, Wisconsin, his clients’ individual preferences help inform the amount of money that should go into their emergency funds. But at least a few months’ expenses is a good starting point.
“I advise clients to have a minimum of three months of expenses in their emergency fund,” he says. “I also tell clients your emergency funds should be big enough for you to sleep at night. Ultimately that is what the emergency fund is for. You need to feel comfortable with it.”
But there’s an upper limit, too. If your emergency fund starts to grow bigger than 12 months’ worth of living expenses, Andreoli recommends taking a moment to reflect on why you feel you need that much – and how that extra cash may better serve you elsewhere, such as in your retirement fund or a brokerage account.
Greg McBride: Six months of expenses
According to Greg McBride, CFA, chief financial analyst at , setting a savings goal is important, but you should remember your goal is a destination, not a starting point.
“The goal is to have enough to cover six months of expenses,” he says. But reaching that number depends on how well you develop a savings habit you can build upon over time. “Your starting point is all about establishing that habit. Set up a direct deposit from your paycheck into your dedicated savings account. That establishes the all-important habit, and then it happens automatically.”
McBride also recommends using this method to work toward multiple financial goals simultaneously. In addition to your emergency savings, also keep your retirement savings in mind. “If you’re not saving at least 10% of your income, you need to get there pronto,” he says. “And once you get there, you want to eventually work https://www.paydayloanstennessee.com/cities/dresden/ that up to 15%.”
“It’ll depend on where you stand on emergency savings to begin with: If you don’t have any, you’ll want to err on the side of putting more in emergency savings,” McBride says. But if your employer matches 401(k) contributions, he says, “You’ll want to make sure you’re contributing enough to maximize that employer match” before putting more money into savings.
Farnoosh Torabi: Six to nine months of expenses
“In the last recession, at peak unemployment, it took an individual about eight months, on average, to find a new job. That’s why I say six to nine months in general is a good rule of thumb,” says Torabi, a financial journalist and host of the “So Money” podcast. For entrepreneurs or those who are self-employed, Torabi bumps that recommendation up to a 12-month minimum of expenses in cash.
But she also cautions that the effects of the COVID-19 pandemic and its toll on the economy are likely to be lasting; as a result, it’s important to continue to rein back spending and put more toward your emergency reserve, especially over the next few years.
Suze Orman: Eight months of expenses
Orman, a New York Times best-selling author and host of the podcast “Women & Money,” has long recommended an emergency fund goal of eight months of living expenses. But she, too, stresses that this is a goal you should work toward; you can begin by contributing whatever you can.
“Sure, it could take years to reach your eight-month goal,” Orman writes in her Emergency Fund 101 blog post. That’s OK, she says. “The important issue is that you are starting to save today and so every month you will be moving closer to your goal.”