Americans seem to have a serious problem saving money. (One recent survey revealed most adults couldn’t come up with $2,000 should an emergency strike now—or the next month.)
“Admittedly, there are plenty of things that sound more fun and exciting than an emergency fund, at least in the short-term,” commiserates Elle Kaplan, finance expert and founder of LexION Capital. “Everything from buying a new purse to going on vacation can seem a lot more appealing than stowing away money for an emergency.”
What’s more, many Americans may be saving—but they’re socking money away without a purpose, postures Mary Beth Storjohann, finance coach and founder of Workable Wealth. Not only does that lack of clarity make it easier to dip into any funds you do manage to stash away, but without a goal in mind—i.e. knowing exactly how much you need to save for an emergency—can make saving up seem like an even more daunting task, she says.
But, while we’d all like to think that an emergency will never affect us, we simply know that isn’t true. Today or two years from now, our car’s transmission will go bust or we’ll be hit in a devastating round of layoffs at work. “This isn’t about pessimism—it’s about practicality,” Kaplan says. “These things have a way of seeming like they always happen to someone else until they arrive at our own front door.” And starting to save—and figuring out that magic emergency fund number—is the key to successfully surviving a disaster.
So, what is that magic number? For most people, our experts say, it’s six to eight months of living expenses, including everything from your must-have monthly bills—cable doesn’t count as a must-have—and expenses such as gas, groceries, and day care for your kids.
“Keep in mind that living expenses are what you need to live reasonably, and very different from your wants,” Kaplan further explains. “Think: keeping the lights on, paying your rent, and a sensible budget for groceries. Although going out with your friends to that wedding or buying a dress might seem pressing, they’re examples of non-essential wants that will have to get put on the backburner during an emergency.”
Storjohann adds that single gals should absolutely aim to sock away six months’ worth of expenses, while those in a dual-income household can slide by with three months’ worth of expenses in savings. “Six would be more conservative, though,” she warns.
What six months’ worth of expenses looks like, in an exact number, is of course different for every person. To figure out your own magic number, “account for any fixed monthly expense that’s a necessity, such as the electric bill, and add in a reasonable allocation for daily costs, such as gas, that allows for a comfortable—but only essential—budget,” says Kaplan. Then multiply by six, and voila, you’ve got what should be in your emergency fund.
Gulp. That number is probably pretty big. It could be four digits—it could be five digits. Either way, it may seem impossible to save up. But rather than focus on that big, intimidating number, attack it in bite-size chunks—it will seem more manageable. “Tackling a huge issue—like saving $5,000—can feel overwhelming, so the key is to articulate simple, smart, achievable steps to get you started on the longer path,” says Kaplan. “Something as simple as skipping the $4 latte everyday can snowball into a fully-funded emergency fund before you know it.”
In addition to cutting out unnecessary expenses and stashing that extra cash in your emergency fund, Kaplan recommends setting up an auto-transfer from your paycheck into your savings account. “This way, you save for your rainy day fund without even thinking about it,” she says. “By setting a portion of your paycheck to transfer into your savings account, you’ll transform building this fund into an effortless habit.” For that auto-transfer, Storjohann recommends opening a high-interest savings account. You can use a site like Bank Rates to compare financial institutions and see who’s offering the highest yields.
Don’t, however, be tempted to put your emergency funds savings into the stock market as a way to grow your funds even faster, Storjohann warns. While you could stand to make more money over the long-term, you also risk losing it in the short-term. And because you don’t know when you’ll need your emergency fund—you’ll use it in an emergency, after all—you will want to make sure all your money is there when you pull it out.
And speaking of pulling out those funds: “You should keep in mind that an emergency fund is not there to cover regular bills if you come up short,” Kaplan says. “Any expense that you can plan for or predict isn’t an emergency.” That means everything from property taxes to the co-pay for your annual ob-gyn appointment are expenses you should work into your regular budget so you can easily cover the cost when they come up.
Lastly, don’t get discouraged as you save up, Kaplan encourages. “Plenty of people get discouraged because they can’t scramble up all the money for an emergency fund at once, but that doesn’t mean you should,” she says. “Every single dollar counts during a rainy day, and any baby-step towards your financial health is important.”
