Our lives have been completely turned around over the past couple of years. All over the world, the pandemic has upended almost all forms of normalcy.
It’s great to see things starting to return back to normal in the U.S., but we also have a pretty widely forecasted economic downturn (i.e. a recession) that may occur in the near future.
The pandemic legitimately created an emergency situation for many people across the globe. And now we potentially get to see what a recession will do to the economy. That’s where emergency funds will continue to shine.
The most common pre-pandemic advice for emergency funds is to have 3-6 months of living expenses in a savings account tucked away for those emergencies.
But that’s not the only advice out there.
Ramit Sethi changed his advice from 3-6 months and now recommends a full year of savings to cover your bare minimum expenses.
Suze Orman came out and said you need to have three years in emergency savings.
Dave Ramsey kept to his usual advice of sticking to a $1,000 emergency fund while paying off consumer debt and then increasing that to 3-6 months of living expenses.
So who you do believe?
Well for one, there is a big opportunity cost to leaving so much money sitting in a savings account making less than 2% interest.
But the most important thing?
The most important thing—as always—is to have as much money in an emergency fund as you need to feel comfortable.
And here are two reasons why.
1. Only YOU Can Determine How Much Emergency Fund You Truly Need
I am not in your situation—or your head.
Neither is Ramit, or Suze, or Dave, or anyone else that tells you how much you should be saving.
But you are.
So how much do you feel comfortable having in the bank? Do you feel comfortable with $1,000? $10,000?
Three months of expenses? More? Less?
This is your show. Only you can run it.
Ask yourself these three questions:
- How much extra money do you already have per month? If you’re living paycheck to paycheck, you’ll more than likely want a larger emergency fund. If your monthly cash flow is high, you probably don’t need as much.
- What is the likelihood of you having a financial hardship? Consider how secure your job is, how young you are, how healthy you are, if someone is going to propose to you and you might need to channel money to a wedding, etc. Health and kids are two more things to consider. This may change with a possible, even likely recession.
- What’s the smallest emergency fund you’d feel comfortable having? Again, this is the magic question. How comfortable are you with the amount you have to take on a financial emergency? It’s ok to stash more than you need if it makes you feel financially secure. This may also change with a possible upcoming recession.
Use these three questions to build an emergency fund that is right for you.
2. You Have Other Financial Cushions
When people give emergency fund advice, they seem to forget that there are other ways to cushion your financial fall.
The main one is unemployment insurance from the government.
Each State is calculated differently, but on average, you’ll receive a portion of your income for about 26 weeks—or six months.
If you’re in Illinois for example, you’ll get about 47% of your income. That’s almost half, which means your emergency fund—if you need it at all—would stretch by about double the amount of time.
So a three-month emergency fund would last you six months if you were receiving about half your income in unemployment.
There are also things you can do to mitigate how much your expenses actually take up on a monthly basis.
You could create an emergency budget of just basic expenses minus all the things you would cut in an emergency.
Combine that with unemployment benefits and your emergency fund could last you much longer than you originally thought.
If you’re not eligible for unemployment benefits, you could get a part-time job that would also stretch your emergency fund until you find another full-time job.
Even a hobby can be monetized both during and after a financial emergency to help bring in some extra income regardless if you lose your job or not.
Your emergency fund is just that—yours.
Risk tolerance for everyone is different, and while 3-6 months of expenses in an emergency fund is still a decent rule of thumb, don’t be afraid to branch out and do what makes sense for you.
Your emergency fund doesn’t need to be humongous unless you want it to be.
There are other things you can do to make up for any lost income or bring in more income in the event of a financial emergency.
Look into your situation, and then build your emergency fund around your life and what makes you feel secure.